POLL: Credit crunch, new IEA production high (but what about the net?), lower world exports? Whither Oil Prices?

There seem to be larger and larger forces impacting oil prices. A potential credit crisis, with lower monetary wealth and tighter credit would certainly reduce demand for oil. Alternatively, if global central banks combat this spectre by continually providing liquidity, this primes the inflationary pumps, which is bullish for oil. At the same time, we recently hit a new all time IEA production high (at least measured by 'gross' production). Will impetus of 2008 Chinese Olympics and other developing countries thirst for oil counterbalance an OECD recessionary impact? Will the reduction in exports from oil producing countries offset any demand destruction? Does anyone have a clue?

Cast your vote in our POLL Feel free to discuss your viewpoint and rationale below the fold, especially if it differs from one of the packaged choices....;)

I am way out of my depth discussing monetary theory, but I am fascinated by the differences between Jim Puplava (inflation next year) and Stoneleigh, et al (as I understand it, deflation next year).

Monetary purists object to my characterizations, but my best estimate is that we should expect to see deflationary trends in the auto/housing/finance sector and inflationary trends in food & energy.

It depends on how governments and institutions handle the crisis. If they let the marginal bank and hedge fund fail, this will have a domino effect on consumers and demand will drop - this would probably be best for long term financial health (if thats a valid word combination...;) This would be deflationary

Alternatively, they could refuse to let any banks fail - and provide liquidity at the discount window whenever necessary. These billions don't come out of thin air - well actually they do. So there are more dollars/Euros/Yen chasing fewer barrels of oil and MCF of gas - hence inflation.

Were I running a hedge fund, I would be a huge buyer of 'vol', as I expect some 3-4 standard deviation events in energy and financial markets in coming years - we've never been dealt a hand quite like this one and people normally underreact to large themes.

If there were a pure play on a company that made tranquilizers and sedatives, I might buy that...

It seems that to have steep inflation across the board, the Fed has to figure out how to get money into the hands of the 'volk' and not simply make huge low-interest loans to banks which might in turn provide cheap credit to large corporations which in turn might expand their payrolls, etc. Lot's of 'mights' here in the trickle down scenario, and, in the end, it is still credit that presumably must be paid back in some way and not a simple expansion of money that will stay in the economy indefinitely.

On reflection of the above: The use of easing credit to stimulate the economy rests on the assumptions of classical economic theory (read: cornucopian). In times of increasing scarcity of one of the fundamental commodities, energy, this assumption is simply wrong.

the problem with the poll is that we are looking at a recession in 2008, but possible hyperinflation after that. if I was asked for the next 6 months, the answer is very different from the answer for two years.
I think that $60 is possible in 2008, but $200 is also possible in 2010. It all depends in too many longer term variables that are currently unknowable. The only fact is that a constant is that oil production will be declining in the future.

good point . Ive changed it to 12 months out....

"Monetary purists object to my characterizations, but my best estimate is that we should expect to see deflationary trends in the auto/housing/finance sector and inflationary trends in food & energy."

WT! You got the lingo! You sounded just like an economist there for a minute.

:) :) :)

Jeffrey - I think you are spot on here. And the evidence is already there in UK equities for all to see. Banks and house builders have been hammered, energy and resource stocks have carried on up. And the market moves side ways - and down.


As you and I know the pain from low oil prices in the past was highly concentrated, while the benefits were very diffuse. Today, it's the opposite. The benefits of higher oil prices are highly concentrated, while the pain is very widespread.

In a larger sense, I think that we are seeing is a fundamental transformation in the relative positions of producers and consumers, especially regarding food & energy, which led to my oft-repeated advice: "Cut thy spending and get thee to the non-discretionary side of the economy."

Also in a sense the credit bubble and oil prices are tightly coupled since cheap credit has allowed the economy to expand despite the flow of money into ever increasing commodity prices. I have to think that the credit bubble and commodity esp oil price increases are tightly coupled. Without the credit bubble demand would have stalled at much lower prices.

So in my opinion the credit bubble and high commodity prices are synergistic. The problem is this ends if commodities are scarce with the economy being composed primarily of non-discretionary spending and high commodity prices. Your right about that being the place to be but its also a sign that the economy is effectively stalled. I've traveled to a lot of poor countries and noted that the milk producers always make money.

I would consider oil producers to be pretty much in the same league as milk producers. They sell a product we must have no matter the cost!

The credit bubble have had a big influence on spending, and with the credit squeze hitting hard in '08 spending will surely plummet.
The average investor will not get hit by the credit squeze as much as the average spender.

When spending stops I think oil will be pretty far down the list of things not to buy.

I would mention:
No need for new clothes as my wardrobe is full
No need for a new car (although this would be wise)
My summervacation alone is more costly than my anual gasoline bill, and is easily made cheaper
No need for homeimprovements.
No need for another big TV or other gadgets.

I believe the above mentioned were the biggest winners of excess spending the past years, and the sectors to get hit the hardest in '08.

I feel very sorry for places like Thailand that gets a big part of GDP from tourism.

Almost everyone I know have been far away on holidays several times in the last 5 years (far away is minimum 6 hours flight)

Sectors to die in '08:
Tourism / Auto / Home improvements / Gadgets

But demand for gas just will not die!

On a personal note my spending on petrol is less than 4% of household income after tax, and that is with danish price of petrol around 7$/gallon. The cost of fuel is such a small part of the cost of the car and such a small part of the budget that I see several less painfull places to save.


Your forgetting that fuel costs are built into virtually everything you buy. So even if you did not own a car indirect fuel usage accounts for a good bit of your expenditure. For many articles the cost of shipping and packaging is greater than the actual item.

So you can expect pricing pressure across a broad range of products even as a slower economy is causing a downward pressure on prices. The net result is of course profit margins for most corporations will begin to fall and the weakest will cease to exist.

Not sure what you do for a living but for most of use if the consumer stops spending on gadgets which still have a fair amount of human input in their manufacture distribution and sale and a retreat to basic commodities which have far less human intervention will effect all of us. Especially as people move to preparing their own food at home.

I think focusing on direct fuel usage is missing the big picture. I barely drive at all but it does not make me comfortable. For better or worse our economy is based on consumption and in particular these days on luxury items.

Its like the housing bubble people are now realizing that it hurts everyone not just the people who where directly involved.

Sectors to die in '08:
Tourism / Auto / Home improvements / Gadgets

But demand for gas just will not die!

Well, everybody can't do that at the same time. Ok, tourism is an axception here.

If everybody cuts discretionary spending to buy fuel and fuel production drops, it's price will just rise until somebody can't afford it.

A net exporter reminder. Our middle case shows that the remaining post-2005 net exports from the top five net exporters will be on the order of 100 Gb of total liquids, versus 2005 net exports of about 8 Gb. Net export decline rates tend to accelerate with time, and I expect that the 2007 top five net export decline rate will be sharper than the 2006 net export decline rate.

IMO, this is the key difference between the early stages of this recession/depression and prior events. One of the benefits of a recession is lower prices across the board. Who knows where oil prices are headed, but in relative terms--especially given the export situations--I think that they will be extremely high.


if you don't have time to finish off the entire article on the ELM how about posting a simple table of net oil exports for your middle case for the next 10-15 years?

In addition I was wondering if you had any thoughts on what might happen as these exporters begin to realize their upcoming negative predicament -and that it is closer than they think- as there is a 'rolling cascade' of countries going from Exporters to Importers. Personally I would expect a frantic investment in substitutes: solar thermal arrays, the nuclear option, in-country downstream oil product production and yes even taxes and allowing some demand destruction to bite... I.e. as awareness grows consumption declines somewhat.


Our middle case shows a 50% net export decline by the top five by 2015. Or, our middle case shows that it would take 100% of the total 2015 net exports from Saudi Arabia, Russia, Norway, Iran and the UAE to meet current US net imports.

The EIA data show a -3.3%/year top five net export decline rate for 2006. Based on year to date data and assuming the same rate of increase in consumption in 2007 as 2006, I estimate that the 2007 top five net export decline rate will be about -5%/year, in other words an accelerating net export decline rate, which is what our model and recent case histories show.

Some analysts and the media are gradually beginning to catch on to the ELM, but they are primarily focused on the consumption side, without paying attention to the possibility of lower production combined with increasing consumption, which results in the accelerating net export decline rate.

Shouldn't be using UAE there. Kuwait is the 5th largest exporter. Shouldn't effect the numbers much. Doesn't matter. 5 through 8 are virtually identical with their production and exports controlled by how messed up and corrupt their leaders are at any given time. The split between 1st and 2nd rate exporters comes after Angola.

If I understand you correctly a 50% decline by 2015 would be an absolute disaster... no?

I'm trying to get my head round this as I don't know what % of the total production amount (85 mbpd?) will see this 50% deduction. As an example if we produce 85mbpd and -say- 55mpd of that is 'Net exports' you are saying by 2015 we would be down to 27.5mbd of Net or the equivalent of NOW producing (85-55) + 27.5 = 57.5mbpd

I would guess at this NET decline rate that things are going to be looking pretty grim in just 2 or 3 years no? (I mean 50% decline is 7%+ a year, although I think you said it accelates over time. Whats your extimated decline %for 2007, 8, 9 and 10?)


Total world net oil exports (total liquids) were around 47 mbpd in 2005, and the top five accounted for about half of that, about 23.6 mbpd in 2005.

I estimate that the top five 2007 number will be around 21.6 mbpd, which would be an accelerating decline rate (-3.3%/year for 2006, estimated at -5%/year for 2007), which is what our model and recent case histories suggest.

We are forecasting that this slide in net exports by the top five (and by many smaller exporters too) will continue, and our middle case is that the current top five will be down to about 12 mbpd by 2015.

Net exports is falling both as a result of falling production as well as rising consumption.

If a country produces 100 oil and consumes 80, a 10% increase in consumption will lead to a drop in export of 40% with constant production.

If production falls 10% in the same period exports will have fallen 90%.

The bad news is that in the oilproducing countries people dont have to pay full price which reduces the demand destruction in these countries.
In the ongoing auction for oil we must remember that a large part of the oil is not sold at full price.

Personally I just hope that the danish government will lower the tax on oil with rising prices.
When oil sells for 150$ they could easily lower the tax on petrol to make end users price paid pretty much the same and still get the same revenue.

I guess I am dreaming, but it would be a nice way to protect end users.

If they just decide that petrol should cost 10 DKK/litre this january and rise 1% each month they would be well of.


Household energy conservation will help the home improvements industry to some extent.

People might decide to vacation closer to home rather than just skip vacations altogether; this would be positive for US domestic tourism.

The one exception in your gadgets categories is television sets - the switch to all-digital in 2009 will force a lot of replacements.


I'm feeling mixed on this. If something's going to go up in price and I'm going to need it eventually then I'm thinking I ought to buy it now.

Also, I'm wondering how to avoid losing money to inflation? I'm very open to suggestion on that point. Got any ideas?

One practical thing I just ordered: A sleeping bag so I can put the lower body into it and sit and work in a cold (40s Fahrenheit) room.

I'm also shifting my cooking toward using more raw materials and less prepared stuff.

*Also, I'm wondering how to avoid losing money to inflation? I'm very open to suggestion on that point. Got any ideas?

Hello FuturePundit,

Here are some suggestions from financial analyst and author Peter Warburton. This is found in an article titled *The debasement of world currency: it is inflation,
but not as we know it.*

I highly recommend his book Debt and Delusion.

The full article may be found at www.gold-eagle.com/gold_digest_01/warburton041801.html


Beneath the surface, the values of the dollar, the yen and the euro have been eroded simultaneously by the over-extension of credit. The latent losses in the credit system, emanating from non-performing loans and defaulting bonds, represent a charge against the value of the currency, as surely as if the edges of the notes and coins had been trimmed away. There has been a reduction in the quality of credit rather than an increase in the quantity of money (net of write-offs). The search is on for a valid yardstick, a measure of monetary value that has not been (and cannot be) distorted by central banks’ firefighting and wrecking tactics.

The search is on for the perfect hedge

What would be the ideal characteristics of such a numéraire? First, it would be in fixed physical supply. Second, it would be resistant to weather-related influences. Third, its ownership would be diffuse, rendering futile any attempt to restrict supply through a non-competitive structure. Fourth, it must be freely tradable. Fifth, there would be no futures or options markets attached to it.

Finally, I list some of the candidates, in no particular order. Each seems promising, yet none of them seems to me to satisfy fully all five of the requirements above.

1. Arable land with a dependable climate
2. Oil refining capacity
3. Electricity generating capacity
4. Water treatment capacity
5. Drinking water, bottled or piped
6. Coastal access, harbours and ports
7. Palladium/platinum/diamonds
8. Real estate in long-standing, distinctive locations
9. Antiques, fine art, stamps and coins
10. Commodities without futures and options markets

"there would be no futures or options markets attached to it".

interesting. but the search for the perfect hedge has always been on. some describe it as a search for liquidity. who knows its origins? tulipmania? does mankind really know how to acheive this successfully without these markets? OK. I see your point.

Cold room 'livin....

1) Cover your head
2) if you do not need fine fingerwork - there are these great new gloves with 'heat pipes' - takes heat from your arms and moves 'em to your fingers.
3) See #2? If you keep the 'core' body as covered as you can, that means your toes and fingers will stay warmer.
4) The less you eat, the colder you will feel....starvation protocol for the body.

All I know for sure is what I am doing--working very hard on finding "leftover" oil fields in the Lower 48.

It might not be a bad idea to invest in the equipment and materials needed for small scale permaculture gardening, with a plan to learn how to do it and to then teach others--basically a plan to set up a small business of showing others how to become closer to net food producers.

In other words, strive toward being a net energy and/or net food producer.

Monetary purists object to my characterizations, but my best estimate is that we should expect to see deflationary trends in the auto/housing/finance sector and inflationary trends in food & energy.

You are exactly right, all else being equal. With zero change in the money supply, that is just what we would expect to see.

However, I don't expect to see zero change in the money supply. The government will inflate the money supply to obfuscate the true situation.

I've just posted on RGE Roubini's blog (under the nickname "RealThink") the following analysis about the "inflationary trends in food & energy".

Professor Roubini wrote:

"The arguments against policy rate easing by central banks are thus threefold:
c) it may lead to higher inflation."

Not "may". Last week's PPI and CPI data shows that the easing so far already "has". And further easing can only be expected to bring more.

"There are at least four reasons why these global inflationary forces will abate once this US hard landing occurs:
d) a sharp fall in oil, energy, food and other commodities prices as a global slowdown emerges."

To assess the validity of the statement in item d), let's first look at the current situation and prospects of world crude oil (actually "All liquids", i.e. including biofuels) production and demand as depicted in page 48 of the OECD IEA Nov. 13 monthly report at http://omrpublic.iea.org/currentissues/full.pdf, updated with the figures from the highlight of the Dec. 14 report at http://omrpublic.iea.org/ , and projecting a December 2007 production slightly higher than November's.

World oil total demand (actual and projected):
1Q06 2Q06 3Q06 4Q06 2006 = 85.5 83.5 84.3 85.7 84.7
1Q07 2Q07 3Q07 4Q07 2007 = 85.8 84.7 85.3 87.1 85.7
1Q08 2Q08 3Q08 4Q08 2008 = 88.2 86.5 87.2 88.9 87.8
World oil total production (actual):
1Q06 2Q06 3Q06 4Q06 2006 = 85.4 84.9 85.5 85.3 85.3
1Q07 2Q07 3Q07 4Q07 2007 = 85.4 85.0 85.0 86.5 85.5

After looking at these numbers, it takes an extraordinary degreee of optimism to expect that production will "surge" in 2008 to meet the currently projected demand.

To see what kind of price action can be expected from these projections, let's compare global demand averages for whole years and their increases:
for 2006: 84.7 mb/d
for 2007: 85.7 mb/d (+1.1%)
for 2008: 87.8 mb/d (+2.5%)
with price action from the past year:
On Dec 18, 2006 WTI = $63 and EUR = $1.31, so WTI = EUR 48.
On Dec 17, 2007 WTI = $90 and EUR = $1.44, so WTI = EUR 63.
That's for a WTI price rise of 43% in dollars and 30% in euros in a year.

Thus, if a 1.1% increase in demand against almost constant production over Dec 2006 - Nov 2007 caused in 30% increase in price in euros, a 2.5% increase in demand against constant production over Dec 2007 - Nov 2008 can be expected to cause a 30 x 2.5/1.1 = 68% price increase in euros, to a price in Dec 2008 of EUR 106. Assuming EURUSD stays at 1.44, that's $153.

Let's now be optimistic and assume that 2008 production will rise 1.4% over 2007, leading to 2.5 - 1.4 = 1.1% as the differential increase of demand vs production in 2008, which is the same value as for 2007. The expected price increase would thus be a further 30% in euros, to a price of EUR 82 and $118.

And obviously, for the oil price to stay at current levels, the world needs for 2008 both an increase in production over current levels AND a decrease in demand from current projections for a combined total of 2.5%. I.e., if demand does rise 2.5% as currently expected, so should production, which looks extremely unlikely.

Therefore, for the oil price to remain in the current range, even optimistic projections for oil production lead to the need of at least a deceleration in global economic growth from current projections. And given the ease and gusto with which OPEC and Russia would cut production levels should a fall in demand take place out of a hypothetical deep recession, it's very unlikely that, even in that case, the oil price would drop substantially.

Now let's take a closer look at where the increases in demand came or are expected to come from, in order to evaluate then the likelihood that they could be prevented or even reversed by way of a hypothetical recession. From page 50 of the OECD IEA Nov. 13 monthly report, annual changes in Mbpd were/are projected to be for the key players:

Player 2005 2006 2007 2008
N.Am. 0.12 -0.21 0.21 0.22
Euro. 0.12 0.01 -0.25 0.21
APac 0.07 -0.16 -0.05 0.18
OECD 0.32 -0.36 -0.09 0.61
FmrSU 0.06 0.18 -0.18 0.14
China 0.27 0.46 0.39 0.42
Ot.Asia 0.17 0.07 0.26 0.19
LatAm 0.14 0.18 0.20 0.16
MEast 0.26 0.29 0.30 0.29
World 1.41 0.84 1.01 1.94

It's evident that the main culprit in the projected jump in demand for 2008 is the OECD, followed by the reversal of the 2007 FSU demand contraction, which the report itself describes as "an outcome that goes against the trend of strong economic growth, but could also reflect efficiency improvements or data quality issues." And within the OECD, the problem is that demand in Europe and Asia Pacific will switch to growth while US demand is staying its growth course.

Thinking now the other way round, if a reduction in global demand growth must be achieved, what are the likely candidates for it? Obviously the OECD, with a recession arising from the unfolding financial crisis. So we have a match here.

And it is easy to see that, even if that OECD recession materializes, the other players are extremely unlikely to reduce their oil demand. The reason for that being:

- For non-oil exporters like China and East Asian countries, the huge foreign exchange reserves that these players have accumulated over the last years, which make their situation entirely different from that in 2000-2003: having already saved for a rainy day (or rather decade), they can now afford to keep growing their internal consumption even if half of their customers curtail the demand for their products.

- For oil exporters like the FSU, ME and several LatAm countries, the fact that it is just not reasonable to expect they would refrain from growing the consumption of their own product.

To sum up, a prompt OECD recession is the only way to avoid triple digit oil prices in 2008 and will most probably result in oil prices staying in the current range. (This of course does NOT mean that such a recession is the long-term solution to the energy problem. It just provides a window of opportunity for addressing the problem in a decisive yet orderly way.)

As for food, the possibility of a fall in prices is even more remote. In the first place for its low elasticity of demand. Secondly because, with a reasoning analogous as that for oil, it is not reasonable to expect that countries that have amassed huge forex reserves or oil exporters would hesitate to draw from their reserves/revenues and skimp on food. Not to speak of food exporters. And thirdly because, with oil prices staying in the current range, the worldwide implementation of biodiesel production will most likely proceed, keeping the pressure on food prices.

Now, are there any other potential benefits from an OECD recession apart from preventing disruptively high oil prices and a likely consequent collapse in the dollar value and the loss of its role as the international trade and reserve currency? Yes, there are a couple of them, and probably of even greater importance.

1. As stated by Matthew Simmons in pages 35 and 36 of his Oct 23 presentation at CalTech ( http://www.simmonsco-intl.com/files/CalTech.pdf ) , allowing demand to follow the current growth path poses a significant risk of shortages in some finished products, likely followed by hoarding behaviour by users, which in turn creates a "run on the petroleum bank." (An ironical but wholly logical side effect of trying to prevent a run on financial banks or quasi-banks when the world starts hitting the physical limits to growth.)

2. Although a recession would certainly curtail demand for electric cars, energy-efficient houses and solar panels, a cursory look at the real world should be enough to notice that the current profile of aggregate demand includes, in a scale ORDERS OF MAGNITUDE greater than those above, things which not only waste fossil fuels but also leave society in a state of ever greater vulnerability to the unavoidable coming energy decline, suburban and exurban construction being the most conspicuous example, followed by production of inefficient vehicles, precisely the two items whose construction/production would be most affected by a recession. So we have another match here.

And I will end with a paragraph from past posts, which seems all the more relevant in view of proposals like Professor Roubini's.

There are a few big mountains in the world where you can drive to the very top. Those who have done that know quite well that it would be very unsafe to drive on the way down in the same way as on the way up. They make a driving paradigm change when they start the descent. In contrast, today's economists are severely paradigm-challenged. They have known nothing but the way up (to Hubbert's Peak), and they don't seem to be able to make the mental adjustment to the way down. As a result, their driving paradigms are becoming unsafe.

Personally, I expect a great deal of volatility but that prices will go lower as this credit story unfolds. This will come at a bad time: we need strong market (or other) incentives to continue exploration, scaling up of alternatives like wind, better battery technology, etc. To wit: a recession and lower oil prices now will make the production/depletion wedge wider down the road. So I voted that we will see $50 again in next few years (though I think all the options I posted are possible)

Note to our CERA readers, if we do see $50, it does not obviate the seriousness and urgency of Peak Oil at all. If anything it will give policymakers a misplaced sense of complacency. And it will make our efforts at TOD and other places trying to raise public awareness on resource depletion all the more difficult.

Nate -- "volatility" -- for me that is the one word that continues to sum up our prospects.

I have a notion that our world is "ungovernable" and so geopolitical concerns will add to volatility of oil price, as will various economic woes.

The underlying geological supply constraints will be a major driver in geopolitical chaos, as will the severe consequences of GW.

Water and food shortages and massive refugee problems will stoke the fires of conflict as more people feel victimized and excluded and intentionally abandoned by the bigger powers.

The more heavy-handed the big powers get, the worse the explosions of asymmetric resistance will get. A new kind of "arms race" and escalation of conflict has already emerged.

I keep thinking that many people will cry out for very authoritarian government simply to help stabilize or regularize the violence in some way. However, there will be plenty of powerful pockets of resistance to that as well.

So unless we figure out a way to make the powerdown process more equitable and peaceful, I think that volatility is the key word for the price of oil -- and maybe for a number of other aspects of life as well?

I agree that volatility will be the watchword going forward. I voted for depression dropping oil prices to $50, albeit temporarily IMO, and with the caveat that a decline in the nominal price doesn't represent the underlying affordability picture in any case. However, I wouldn't agree with the phrasing that the price would settle there - that sounds like far too gentle a description for the fallout associated with demand destruction on that scale.

I see a tug of war between supply issues and demand issues, and though I think consumer demand destruction will come first, I can see plenty of reasons to predict supply disruption in the not too distant future. Ultimately, I think supply disruption will drive prices, but not in the short term IMO. In the longer term I can imagine consumer demand being replaced by military demand as supply disruption starts to bite.

Our ability to maintain our complex market and trading arrangements for oil are probably themselves dependent on the availability of cheap and reliable supplies of energy. IMO the risk of a global resource grab due to peak oil is high, and the result of that could be the loss of a global market for oil, as supplies would be tied up in bilateral contracts or fought over with concommittant destruction of infrastructure. Energy supplies would be neither cheap nor reliable under such circumstances.

The backlash against the perpetrators would probably be significant, as people priced out of the market for an essential commodity are not likely to take it lying down. We could see sabotage, terrorism, and piracy by people with little to lose. Price could vary significantly in both space and time, although I think the overall trend will be toward a much higher price in the long term. Against a deflationary backdrop, a rising price in nominal terms would mean a skyrocketing price in real terms.

"I can imagine consumer demand being replaced by military demand as supply disruption starts to bite."

Their strategy is always the same:


Interesting movie, but I wonder why the attack on religion was necessary. I think that peak-oil will likely put an end to globalization. The Amero is non-existant so far, and there are constitutional contraints to its creation. The SPP site: http://www.spp.gov/myths_vs_facts.asp addresses many of the things that Lou Dobbs spoke about.

I surely hope we get supply issues first, solved by demand destruction.

Worst case IMHO would be to have demand destruction arising from the looming recession, as this would delay the widespread acceptance of peak oil.

What is currently emerging is worst case...

If we get a few years of recession we would hit the oil production limit on the falling side of the curve and we would have much less excess spending to cut, and much less time to the transition.

I hope we hit the limit on oil production soon, so that everyone will accept PO, and start the transition.

At our current situation I see no problems in reducing oil consumption 10%, and we are facing nearly flat production ahead. Not good, but manageable.

Hitting PO with less savings, less waste and a steeper falling oilproduction would be bad.


Won't recession make our economic woes worse? When do troubles with derivatives float to the surface? Will $50 oil reduce oil supply? We talk about recession as a temporary correction to a healthy market. Is the market healthy? Is this coming recession a correction, or has the "long emergency" arrived?


The solutions the PTBs want to impose make the situation worse, almost without exception. That delegitimizes government, no matter if martial law is declared or not.

Of the hundreds speaking yesterday in Portland Maine for and against Plum Creek's massive development in our unorganized territories, only a small handful of us made the case that global issues - climate change and resource depletion - dictated that the LURC commissioners stop the project.

I made the even more esoteric case that LURC had no authority to destroy the planet and the web of life, that they had no authority to delegate that destruction to Plum Creek or any other corporation, and that if they don't stop this, the largest ever development, when? That knowing the science behind global climate change and resource depletion, they must realize that they exceed their jurisdiction by doing anything other than stopping the project.

Ungovernable, yes. Our laws probably say they have to approve the project. Commissioners and Governers need to start breaking those laws if they intend to maintain any sort of social contract.

cfm in Gray, ME

There's really no way for oil prices to drop down to $50 after peak unless we have a global collapse IMO. Even a severe recession in the USA wouldn't cause prices to drop much because the Chinese would buy the excess. And a global collapse would be so catastrophic I doubt you'd have any real global trade in oil at all so you still wouldn't see a "market" price of $50.

Capitalism can't run in reverse. Our social safety nets can't handle millions and millions of unemployed/homeless people. And its not like people can go back to the family farm like they did during the depression. There's no farm to go to.

A global collapse that would lead to a large price reduction therefore means complete social breakdown and dieoff (e.g. people shooting each other over heads of lettuce, etc.). Or it means a global WW3 with WMD. Either way there would no longer be a real oil market. So I expect to see oil prices continue to rise - until we reach such a collapse.

I agree your scenario is possible

a)we still havent reached peak - last month hit new record
b)don't underestimate the power of the marginal barrel. Steep discount rated people are who move the markets - they don't care about long term societal 'wedges' or dislocations - they care about their monthly/quarterly P/L. We could easily drop to $50, even in the face of peak oil. If the US economy implodes, Chinas will be worse (except they will throw everything including kitchen sinks at it to help save face for Olympics) - they have enormous overbuilt capacity there so any global recession will be leveraged in its impact on chinese demand, IMO.

Capitalism CAN run in reverse, for short periods. Its called the business cycle. Boom, bust, etc.

If the US economy implodes, Chinas will be worse (except they will throw everything including kitchen sinks at it to help save face for Olympics) - they have enormous overbuilt capacity there so any global recession will be leveraged in its impact on chinese demand, IMO.

I wouldn't say China's will be worse than the US, but I completely agree that China has constructed a huge excess of productive capacity that should depress it's economy for years once the bubble bursts. IMO China would see its export markets collapse. The huge amount of bad debt in the Chinese banking system would then become far more of a problem.

IMO China is on the verge of their version of the 1930s (a deflationary depression early in their ascendancy), while we are facing something worse. In the 1930s we had a depression despite plentiful resources and a skilled populace used to providing for themselves, as a liquidity crunch caused the economy to seize up. Now we face a worse liquidity crunch (since the excesses of this speculative mania have been worse by every measure than they were in the late 1920s) with depleted resources and a deskilled populace structurally dependent on complex life support systems, which are themselves dependent on cheap and reliable energy supply.

The huge amount of bad debt in the Chinese banking system would then become far more of a problem.

It seems that us Westerners assume that China's banking system will operate more-or-less like the OECD's banking system(s). I have a strong suspicion that this is not the case, although I'm not sure at all just how the Chinese central government will handle bank collapses, debt defaults, etc. I would guess that the Chinese government will show a greater willingness to simply absorb losses and write them off in a manner that Western bankers would find unthinkable.

Any opinions on this?

The Chinese are still highly dependent on external investment for their growth. A attempt to seriously manipulate the banking system will both dry up external money and send wealth pouring out of China. Look to Russia as and example. Chinese are a lot more sensitive to manipulation by the government and I suspect that any overt moves will cause the wealthy to activate their pull out plans. Every wealthy Chinese person I know has a safe house and hidden bank accounts and plans to cut and run when the party ends.

The 1982 Kuwaiti Credit Bubble & Stock Market Crash

This is a fascinating case history of virtually unlimited credit expansion, until the thing imploded. In the latter stages of the boom, Kuwaitis were writing post-dated checks to finance stock purchase, and in many cases, the underlying companies actually did little or nothing.

There were individuals who had written post-dated checks for billions of dollars, to buy stock. The premise was since the market only went up, the post-dated checks could be paid off at a future date because of the appreciation of the underlying stock. Sound familiar?

The unsettling thing happening today is this combination of the imploding credit bubble and increasingly expensive food & energy.

It might be a good idea for someone to write an essay about the Kuwaiti credit bubble. It's a very compact, and recent, case history--and it illustrates the use of debt instruments as "money." The post-dated checks were frequently discounted and sold for cash.

A shorter version of my longer post the price really depends on the nature of unmet demand. For example the demand for food is fairly inelastic so the demand for diesel for farming is inelastic to the point of break down. From what I can tell what we consider economic problems i.e zero or slightly negative growth do not result directly in large changes in oil consumption.

This is older but I think a fantastic piece on energy and the economy.


The key is that globalization and the dispersion of energy usage across borders has allowed us to translate higher energy prices into more debt. I think this mechanism is fairly robust and will remain viable until the fiat currencies used to create unsustainable debt implode.

In effect the current global economy can either expand slowly which means we see increasing oil prices or implode it does not seem capable of handling old style mild recessions since multiple central banks are playing games which allow debt to spiral out of control.

So my vote is increasingly strong prices leading to a spike then collapse. I just don't see how we can have a mild global recession.

Nate I have a very hard time convincing myself that fuel prices will fall due to a lack of demand re economic recession/depression.

Would not cheap fuel stimulate the economy again?
Cheap fuel would allow more travel to search for work, increased farm production, a lowering of production costs to re-stimulate consumerism etc.

IMO the major trigger for a recession/depression will be the high cost of fuel.
Fuel in all forms will continue to rise as production falls and stoke the fire of economic collapse.

The collapse of consumerism won't lower the price of fuel due to a lack of demand, we will still be using as much as we can get hold of, in last ditch attempts at mitigation.

I voted for number 2, the time scale is the unknown for me.

Nate I have a very hard time convincing myself that fuel prices will fall due to a lack of demand re economic recession/depression.

Would not cheap fuel stimulate the economy again?

In economic terms, demand presupposes purchasing power. Demand is not what people want, but what they are ready, willing and able to pay for. During a liquidity crunch where there would be little money and almost no credit, what people could pay for would be much less than is currently the case. One would therefore expect the price of oil to fall in nominal terms.

However, what matters in terms of affordability is the relationship between price and purchasing power. Oil at a lower nominal price need not be more affordable - in fact it could easily be less affordable (if purchasing power falls more quickly than price). IMO oil might end up being cheaper for a few, but is likely to be effectively more expensive for the majority.

The bottom line for the price of fuel is how it affects business.

We all know big business depends on market growth to satisfy investors. Market growth requires more fuel. Scarce fuel means higher prices.

If the price of fuel forces goods and services to heights above which the working man can buy, that of course begins the feedback loops to economic collapse. Unless wages rise in concert with the price of fuel we get a depression, if wages do rise we get exponential inflation.

What other reason is there for the high cost of fuel other than its availability?

What I'm trying to say again is that falling demand IMO will not lower the price of fuel relative to a consumer price index, simply because it will remain in short supply.

Oil/fuel will be like money was to the great depression.
Unlike the depression though the money supply improved in time.


I listened to your interview with Jason on the Reality Report so I think I understand your argument. Of course, anything is possible. If we get 25% unemployment, like in the 30's, demand for oil may drop faster than production even with the developing world still growing.

I think that Nouriel Roubini's outlook seems very likely: hard landing in the US (maybe very hard) and slower growth, but not outright recession, in China and India. These would seem to balance out a bit and keep petroleum demand at least equal to output.

The key factor I don't think you address sufficiently is the dollar. With our massive trade deficit and weakening economy, the dollar could easily fall to 60 which would put another $25 on the price of oil.

Ultimately, I think the more serious problem in the credit crunch is who is willing to loan Americans the $60 billion they need every month to buy oil and various other items from abroad? Right now it is the foreign central banks doing the lending. Tomorrow?

And if no one does, how far does the dollar need to fall to balance out trade including oil?

Scary thought.

This is why I don't worry about under-investment in alternatives. Americans at any rate will be looking for alternatives, even if the Chinese and Indians are still focused on the internal combustion engine.

Just my view. Great show with Jason, enjoyed it very much.

"This will come at a bad time: we need strong market (or other) incentives to continue exploration, scaling up of alternatives like wind, better battery technology, etc."

With all due respect. I don't think so. I think this is the exact wrong way to pray for things. That is my humble opinion.

What I wish for is that humans suffer a shock that induces a 'eureka' moment for mankind. Kinda like Hiroshima.

I'm not sure if anybody noticed. The 'Let's have a Manhatten Project' approach isn't really working. Nobody out there understands peak oil. I don't know about anybody else here, but I usually don't run into people who understand peak-oil(everybody has 'heard' about it, that's because people always shake their heads yes when they get asked questions like that, they don't want to sound like idiots, right?). That's because you can take the daily readership here and multiply it by how many sites there are like this and you can quickly figure out the probability of somebody around you having the first clue about what is coming out of your mouth when you talk about peak-oil.

And that's a failure on our part. That's a failure of the peak-oil community. It has had years but its impact has been minimal. Not enough to have a jump on the problem.

Maybe Mother Nature or God will help us out this Christmas season. Kunstler is beside himself. He doesn't know what to do.

Maybe Santa will send us that oil-shock we've always wanted. Needed.

About that recent "all liquids" production high: Each year that number includes a lessor amount of conventional oil. The sustitutes often have less energy density like ethanol or have low EROEI like tarsands. We are getting less net energy for higher energy and $$$ inputs.

The price of conventional oil will continue to ratchet upward, even eith some backsliding in price every few months. The coming recession/depression will cause a plateau of oil prices becuase less use will coincide with less demand. Prices will never return to $40 per barrel unless unemployment reaches 30 or 40% and the world economy is permanently wrecked.

I didn't pick any point, about the only thing I can say is that I doubt either of the last three will happen. There is just to much noise out there to really have an opinion for sure.

the old hermit

"you can cure ignorance, but you can't educate stupitidy"

Regarding net vs gross, you are preaching to the choir. I guess a good question to ask the oil optimists is: If we do eventually see 100 mbillion barrels per day (via ethanol, CTL, tar sands, oil shale, etc.), will costs of oil and basic goods be about the same as now, lower? or significantly higher? Lower net energy for the whole system means higher prices - because non-energy society has to compete (via bidding or rationing) for the BTUs left.

But for a while, we can substitute nat gas for the lower net from oil. Nat gas is around 85% of the energy input into oil and gas production/refining - so we are trading NG for oil BTUs.

how long a while?

does NG projections on demand/production include the additional substitution demand created by oil depletion?

or does NG supply get double whammied from two sectors of demand?

or is the cross over between oil and NG fungible enough it doesn't matter a Btu is a Btu so to speak in this cross over area?..

the question is will peak C&C cause an acceleration in other fuel use as the economy tries to keep the power up.. so to speak.?


I have a question: How much of that 'total liquids' is counted more than once? The Products that go into oil sands/ethanol, or even the refinery outputs that are then added back in again? Even more important for the people who believed that we had already hit peak: is there now enough of this double-counting to discount this peak?

I have a question: How much of that 'total liquids' is counted more than once? The Products that go into oil sands/ethanol, or even the refinery outputs that are then added back in again?

Probably not much more than is double-counted with crude oil.

NGLs, which represent the vast majority of "other liquids", are produced in a roughly similar manner to crude (i.e., more-or-less pumped out of the ground). Oil sands (which are counted as crude) and ethanol are more energy-intensive, but the vast majority of that energy isn't oil, so it's not clear either one uses more oil than the large machines and long-distance shipping involved with regular crude.

Even more important for the people who believed that we had already hit peak: is there now enough of this double-counting to discount this peak?

It's doubtful it's changed much in the last 2 years.

If you're trying to find a reason to discount the latest production numbers, you'd do better to look at energy density, as a barrel of NGL has only 50-60% the energy content of a barrel of crude. It's not clear how much that matters for feedstock applications, though, so any argument you make in that regard would have to take that into account.

As a first approximation, EIA figures say liquids other than C+C have increased from 10.83Mb/d (2005) to 11.06 (2006) to 11.26 (2007 through Sept). Roughly speaking, then, one might argue that energy density considerations shave almost 0.1Mb/d off of current production as compared to 2006 production. As it turns out, though, that's less than a third of the difference between the recent production figures and the previous peak, so an energy-density-based argument is unlikely to change much.

It seems to me that the more important question than double-counting is the net energy return and how this number is undoubtedly falling. It is one of these areas where it may be difficult to calculate accurate figures, but most estimates I've seen have us fairly well past the peak of 'available' energy vis-a-vis fossil fuels.

Reading recent reports of deep-water discoveries and stories of the production of these being put off because of technical and logistical difficulties emphasizes the fact that FF energy is getting more and more expensive in energy terms and therefore being delivered at a lower energy-returned in the EROEI formula.

the net energy return and how this number is undoubtedly falling.

Not necessarily. If the problem is falling oil production, then it can be worthwhile to trade natural gas btus for oil ones.

Natural gas itself will peak, of course, but analyses typically have it doing so a decade or two after oil, so trading natural gas for oil would be a sensible thing to do to mitigate that initial peak.

Not true for ethanol, however, which does require diesel and other refined products.

Not true for ethanol, however, which does require diesel and other refined products.

Ethanol requires much less oil energy than it contains, even for US corn-based ethanol (vs. Brazillian cane-based ethanol, which is much more efficient). Roughly speaking, 90% of the energy consumed in making it is natural gas (for fertilizer and for fermentation/distillation heat), so it's another effective way to trade natural gas energy for oil-equivalent energy.

There are valid questions about whether it's a good way, though.

I have read that a lot of the energy going into the tar sands and corn ethanol production is natural gas. But the equipment to farm/transport corn & ethanol is mostly oil based along with pesticides/herbicides made from oil. Tar sands uses a lot of oil for mining operations, however percentage wise is still less than energy from nat gas used to cook the bitumen.

Shipping costs (in energy) also degrade a products net energy value. Shipping ethanol in RR tank cars and trucks uses fuel that gasoline doesn't use. Pipelines are the most efficient form of transport as they have no empty backhaul like trains and trucks.

I'm betting volatility; $90-150.

The key is China--If they continue strong growth, or the dollar drops more precipitously (frx. if China dumps dollars heavily), we won't have a short term drop. If China falters, then it may decline temporarily, but I am betting on China keeping its head above water at least until the start of 2009.

Deflation may be in the forcast in the USA, for non-essentials, but food and energy have nowhere to go but up.

[snip] Numbers up to 2006 From "The Freezing Point of Industrial Society"--

1998 $15
1999 $21
2000 $32
2001 $25
2002 $27
2003 $30 (48%-- from previous year)
2004 $38 (26%)
2005 $51 (34%)
2006 $64 (25%)
2007 $95 (48%)
2008 $142 (49%)

I cast my vote with what appears to be 'the herd'--
prices 'whipsaw' between numbers that seem low to me:

I would have put the range for next year from 80-150.

What I don't think the futures markets are getting:
1) the numbers are 'fudged' to make conventional oil mopre abundant than it is.
2) demand for petroleum products is less elastic than economists assume
3) demand in China and India trumps demand in the US.
4) the notions of 'collapse' never seem to materialize because, for the most part, people continue to do whatever they've been doing.
5) governments/corporations continue to subsidize and manipulate prices of gasoline to keep consumers consuming.

I have a degree in economics, but little of that ideological thinking informs my opinions about these matters. Collapse is possible.
However I don't think it will happen in 2008.

I think we are already seeing macroeconomic shifts in investing away from certain sectors and toward others like renewable energy.

One sector's decline is another's boom.

But I would agree, intuitively, with WestTexas:
the prices of some things with rise while others fall.

Nothing will be simple. For example: Housing prices in some areas will skyrocket. While housing in other areas depreciates rapidly.

Overall, the value of the dollar will fall and that will be an 'inflationary' trend.

From the lows of 1999, we are up 800% ($90-$10=$80 = 800%)
It is much easier to forecast things we are used to seeing. We have become habituated to $90 oil, even though $80 was a shocker just 2 short months ago.

Based on long experience with economists and expectations, I expect oil will do what is least expected and then the reverse...:0) (I'm serious - Im long oil and have been for years, but Im paring down positions to almost nothing right now - if we bust through $100, I will get back in).

Well Robert Rapier has predicted a retraction in price to around 80 a barrel early part of next year I tend to agree with him on this. So far the price has remained stubbornly high which may be a result of pent up demand in the third world. If the third world is indeed running into problems as news stories indicate we may have a much stronger and increasing floor on prices.

The key seems to be the floor price and that seems to be marching upwards. I tend to think any overall economic slow down that may result in to be a price cut will result in at best temporary lows before unmet demand drives the price higher.

The key point on prices at least seems to be who is being priced out. For example if one wealthy person and a bunch of poor people go to bid for a Ferrari in a open auction then the wealthy will win and pay a low price. If its more than one wealthy person bidding then the price will be a lot higher. Taking oil away from poor Africans to fuel our SUV's is easy taking it from other wealthy nations will be much harder.

Obviously the sustained high prices in the market indicates to me at least that some people that want oil are being out bid but we don't know right now who the wealthiest loser is.

My best guess is that fairly wealthy South American countries and others such as the Philippines are starting to fall into the loser category.

Egypt and Turkey seem to be next on the list of countries that may experience "peak oil"


So to me at least peak oil at least from the consumption side is a phenomena that moves slowly up the economic ladder. And the price is controlled by the wealth of the weakest bidder.

This means of course that when the competition reaches the richest nations that we will see a large spike in oil prices. Best guess is the end of 2008 and I think by 2009 for sure that we will see large spikes in oil prices.

Oil will remain 'peculiarly' priced.

For example: It continues to be 'priced' less than bottled water.

Expectations continue to value it as if:
1) it were infinite;
2) substitutes are available.

However its centrality to the global economy is a strange force that maintains price at levels suitable to the needs of the 'growth paradigm' that is inherent to the world economy and short term horizons.

This situation is, of course, disastrous as we approach a new pricing mechanism that:

1) kicks in with the fall of OPEC; that is, OPEC must collapse as surely as did the Texas Railroad Commission.
2) oil is finally valued more accurately as a finite resource with accelerating depletion.
3) all substitutes are 'parasitic' upon petroleum.

With regards comments of Pitt the Elder, I stand corrected on his numbers with regards average prices; my projections are year-end.

And I thank him for the comments on elasticity of demand.

However, the elasticity of demand for oil, I would caution, cannot be realistically separated from other factors.

To grapple with my argument, we would need to consider how demand for non-essential items compares to demand for oil. This phenonmenon is too complex to consider in these comments and defies a discrete analysis.

In other words, it's all a tangled mess and defies a quantitative measure such as Pitt the Elder has given.

As a secondary caution: I think it is distracting to even trouble with demand analaysis for the US and we would all do well to focus on demand in China.

As far as China goes they have no choice but to continue to grow at all costs. They are probably decades away from being able to handle a economic slow down without major repercussions. They may grow at a slower rate but they cannot stop. They also have the money to finance unreasonable growth for several more years so I just don't see it stopping despite oil prices. I think that they may increase internal consumption faster of the export markets start to decline to try and soak up excess production but no matter what we should still see strong growth. This means I think that the Chinese will probably allow the currency to float in step with declining exports to spur internal consumption. This would also mean that we probably will see stronger imports into China for luxury goods.

In short any slow down in oil demand in the western economies will probably be absorbed by the over heated Chinese and Indian economies for a while longer as internal demand increases. Sure the growth may slow from its current ridiculous pace but they should be able to continue strong growth for another year or two at least if not longer.

2007 $95 (48%)

The average (world) price for 2007 is going to come in very close to $69.

From that data series, 2006 was $60, 2005 was $50, 2004 was $35, and 2003 was $27.

Oddly enough, despite the sharp runup in prices we've just seen, this year has seen the smallest absolute increase in average price in several years, and the smallest relative increase since the recession in 2002.

What I don't think the futures markets are getting:
1) the numbers are 'fudged' to make conventional oil mopre abundant than it is.

To a large degree, oil is oil - it doesn't matter to a consumer whether it's "conventional" or not, and too much "unconventional" is only a problem if it impacts flow rates. (Which it may already be.)

2) demand for petroleum products is less elastic than economists assume

The EIA's stats on US oil consumption show that every 4-week average is lower than the corresponding 4-week average in 2006, all the way back to late August when the price runup started. Consumption over that period is lower by about 25Mbbl, so there's certainly a level of elasticity in there.

Roughly speaking, the price is up 50% and demand is down 3% (down 1.5% instead of up 1.5% as expected), suggesting a short-term elasticity of around 0.06. Oddly enough, that's quite well in line with a paper on price elasticity of gasoline that was posted here some months ago, so I'm not sure it's clear that economists don't have a fair idea of the price elasticity of oil.

5) governments/corporations continue to subsidize and manipulate prices of gasoline to keep consumers consuming.

More to keep them happy and supportive - witness Saudi Arabia, Iran, and Venezuela.

Your link goes to the EIA data. I just added up the current 11 months and the average price over that time is 70.55, not $69. And to reach $69 presumes that the December price will fall way below where it sits right now. Even falling to $85 average for the month leaves us at $71 per barrel for the year.

Furthermore, you are harping on West Texas Intermediate crude prices. WTI prices in the first half of 2007 were affected by technical issues at Cushing and were discussed here earlier this year. Surely you knew this?

The Brent prices also come out higher than the WTI prices for the 11 months of available data. And in both cases the average is above the average price you quote. In both cases, December prices would have to fall well below $69 per barrel to drag prices back to $69 per barrel. So I have no idea where you come up with $69 per barrel. Both price sets refute your assertion that this was the smallest absolute increase in recent years.

Finally, the 2005-2006 price increase came in at close to $10 per barrel. Likewise 2006-2007. And it looks very certain that the 2007-2008 will come in similarly. That's three straight years of approximately $10 per barrel price increases while demand elsewhere (China and Asia generally) has been rising and while we have a confirmed plateau over the same three years with variations in production amounting to just over 1%. One model that would support steadily increasing price in a market of flat supply is Westexas' Export Land Model. Do you have a proposed explanation that you believe better fits the facts?

Your link goes to the EIA data. I just added up the current 11 months and the average price over that time is 70.55, not $69.

I humbly suggest you added wrong, then - I downloaded the Excel file and told it to average every week in 2007 (with estimates of $90, $95, and $90 resp. manually added for the last 3 weeks of the year).

Having Excel average the already-seen weeks of the year results in $67.95/bbl. Check out the file yourself if you don't believe me.

Furthermore, you are harping on West Texas Intermediate crude prices.

Uh, no, I'm talking about "All Countries Spot Price FOB Weighted by Estimated Export Volume (Dollars per Barrel)".

That explains you getting the wrong average price, though.

And it looks very certain that the 2007-2008 will come in similarly. That's three straight years of approximately $10 per barrel price increases

There's no need to make assumptions about the future - as I said, 2004-2005 prices saw a $15/bbl jump.

while we have a confirmed plateau over the same three years with variations in production amounting to just over 1%.

Oil supply has been rising at ~0.7%/yr over that period. We've covered the lack of a plateau already.

Do you have a proposed explanation that you believe better fits the facts?

Simple supply and demand.

Supply is rising slowly. Demand is rising quickly. Ergo, price increases to equalize the two. Other things may also be true, but it's not clear we need anything other than this very basic concept to explain the increase in prices.

I expect over 100/barrel in coming year. China is still going full bore and there will probably be some catastrophe (war hurricane etc.). We almost hit 100 with no really bad news this year.

Nate, this poll is very sobering. It points out the impossibility of being able to predict what will happen.

I wouldn't touch this with a ten-foot pole.

Go with the flow. The trend is your friend. etc. etc... but I hear you - that why nothing will surprise me - except status quo.

everyone (ignoring the 5% that think it will be above 150, and the 5% that think it will be below 50) thinks it will be 110(+ or - 40%), the futures curve think it'll stay the same price (85), but the largest vote is for volatility around the current price. (i voted 150) (the 110 is based on twice as many people choosing 150 over 50)

I think whatever can be produced will be burnt. oil shocks that trigger price hikes are supply interruptions. The price is almost meaningless. $100 (or any other value) oil may not not trigger demand destruction. Depletion will create consumption destruction. It's a simple view.



Interesting idea, but far too simplified to be of any deductive value.

The Credit, currency and subprime issues are 'largely' independent of oil. However, Oil is dependent on them.

Recession is already in effect, likely. Just ghosted by '.gov' numbers.

January will still give a 60% prob of a Triple Yergin. A likely retreat as the Feb corporate reporting turns ugly (it will) and the Boxing Quarter trys to drum in sales.

By May, and without any sign of significant stock builds, it certainly looks like a Triple Yergin is about 95% likely.

I expect TPTB to buoy the markets thru the election, after which all bets are off. That will likely mean opening a few spigots and inflation!

PS: This poll should have been conducted in YERGINs!

Stumbled across a CERA paid AD on Google (type 'Peak oil' and review the side ads) I guess they still need to 'convince' people there is no such thing as Peak Oil.

Nate - I voted number three which is equivalent to ain't got a *g clue.

Would you care to list what you consider to be "known unknowns" and "unknown unknowns" that may profoundly impact the outcome.

As a follow up we need to have a poll on the average oil price for 2008. I think the $85 future mark may be close.

What's the average price been this year? And whatever happened to SAT?

I will do a follow up poll in next week or so on avg price for 2008 - after reading Stoneleighs finance round-up yesterday, 'volatilty' was the word shaping in my mind so I posted this poll just as a discussion piece.

I'll attempt to answer your first question as I think I have some insight to the known unknowns - but how does anyone know about the 'unknown unknowns', by definition?


Perhaps we can say 'unknown unknowns' in terms of what the market/media doesn't know?

they know about the unknowns in Iran etc, but there's plenty of unknowns we ponder upon that they have barely considered. listing those factors as you see them would be worthwhile.

do you know what i mean? :-)

"One of the greatest pieces of economic wisdom is to know what you do not know"

J. K. Galbraith


I think I know what Galbraith means, but then again... Surely one cannot really 'know' what one doesn't 'know'? Because if this were true, one would, infact, know it. Doesn't Galbraith really mean that it's important, if not vital to be aware of how much one doesn't know or understand about very complex processes? Isn't this a plea for intellectual humility, or at least caution, and an attempt to reign in our arrogant conceit that we are omnipotent? Isn't this much the same a the famous Socratic axiom, that 'The more I know, the more I realise there is to know'?

a possible unknown-unknown(at least to Joe six pack USA): Riot in Europe (probably France)over diesel/gas shortages. We might be able to see it coming, but Joe does not have a clue.

Other things that might affect the oil prices next year:

* Not just riots in Europe, but more social destabilization in general in oil exporting countries
* Significant climate impacts
* Pandemic
* Global military escalation
* US martial law declared

Suppose we place a low probability of each of these happening, 3%. The probability that none of these will happen is (0.97)^5 = 85.6%, or roughly a 1 in 7 chance that at least one of these will happen next year.

Also, according to the poll currently, the voters cumulatively think that we will pass $114 next year.

I give it a 1 in 7 chance that next year we begin to slip from unmanageable complexity into chaos.

Cry Wolf
"And whatever happened to SAT?"
I've been asking myself this for months
please sat grace us, grace us

re SAT amen!

As we get into PO or decline, it seems it is taking less and less in the way of significant events to bump up the price of oil. Hurricane Katrina was one such obvious event likely related to climate change as well. I agree that a recession/depression will reduce demand in the US & probably Canada. But Europe and most of the rest of the world appear to be used to using less oil (smaller vehicles, denser living quarters).

We see declines in many oil producing regions such as Mexico, the North Sea, and politically unstable areas. The big two producers Russia & Saudi Arabia are using more of their own oil and not really (or able?)increasing production. Our tar sands in Canada are coming under increased scrutiny for being one of the biggest emmitters of GHGs in the world and we know the they may even be running into water availabiliy issues. They already have manpower limitations. Iraq is just one example of armed conflict related to oil. We know there is rationing starting in China. And I have not even mentioned the sub-prime sink-hole.

The longer the price stays where it is, the more we are all going to be effected. Price of food is already going up, which is probably a bigger indicator (despite the biofuels debacle) of the effects of PO than most of us realize.

What are the knowns and unknowns and how many signifcant events will happen in 2008 to push the price up or down?

My choice was $150 for coming 12 months.

70 - 130, but mostly because the picture isn't clear in my head yet, in the sense that I think that there is a element of economic warfare to it. It's not just pure economics or pure geology.

I think we have seen or are seeing a shift in power towards a much more multi polar world and this would play out in a way that is very much location dependent.

I think we have seen or are seeing a shift in power towards a much more multi polar world and this would play out in a way that is very much location dependent.

Agreed. The world has effectively become 'smaller' over the the last few decades due to the availability of cheap and reliable energy supplies. IMO it is about to become 'larger' again. There's plenty of scope for local variation.

We're certainly at an economic turning point for the world. Once the extent of the economic downturn is clear int erms of job numbers and neg. growth in USA/Japan /EU/China then we can see how the recdution i demand ofr oil goes and how much the mraginal reduction of demnad effects the price with presumably constant production and steady exports. If hte megaprojects list were done and were combined with the ELM estimates for 2008 and you could presume say a reduction of several million in demand due to recession globally then you could maybe estimate the price but this will all unfold over the next several quarters to 3 years. I guessed the middle scenario becuase it is all so uncertain. As long as the governments keep rigging hte markets so they can'T fall th party willocntinue for awhile but acutal job losses and people sitting on thier hands will decrease imports from China/Japan and their jobs and USA service jobs and USA/immigrant Mexican construction work and corresponding truck and SUV usage. If supply rises due to some megaprojects coming on line and demand drops the price for a barrell could seriously fall then Saudi Arabia might have to drop suply to support the price again. On the other handif ELM effect reduces supply due to wealth effect, gas subsidies in Rusia and Saudi Arabia, Iran, Venezuela, etc. maybe canceling out the new projects then it could stay same as now. Everything is now up in the air. We really have to know if the megaprojects are just a mirage or reality and how the recession impacts usage in all countries.

Whatever the price, it will cost a lot more in blood, sweat and tears than it does now. If you need it and can't get it, what is the price?

Please do more polls. I would like to know if posters here put actions where their mouth is. Some examples:

How do you heat your house?
What mileage does your car get?
Is alternative energy produced near you?
Do you live in the country or in town?

I can think of many more and am sure you can too.
I think its fun and would build traffic to the site as visitors would want to find out what other peak oil aware are doing. I would like this to be developed into a regular feature just like the drum beat.


Good questions for a poll.

How do you heat your house?
With wood. It pains me to know this is polluting, regardless of how efficient the heater is. It is a good incentive to maximize the insulation efficiency of the house. Am looking into ground source heat pumps for later when old age renders chopping wood less attractive.

What mileage does your car get?
Honda Insight ~65mpg. Nissan pickup ~22mpg seldom driven

Is alternative energy produced near you?
Not that I know of.

Do you live in the country or in town?
Rural. ~7 miles from a small (9000 pop.) town. IMO an ideal situation. Within easy bicycling distance of town services but relatively far (30 mi) from an urban environment.

Another item for the poll might be what the primary budget items are for people. Our budget consists mainly of gasoline and groceries on a monthly basis with gasoline being about $40/month. Yearly, land taxes and IRS taxes would be the big ticket items.

It was nearly a tossup between (2) and (3), but I went with the later.

I wanted to caution that demand elasticity of something like oil is likely greater for longer time horizons. An instantaneous change of price offers little opportunity for most consumers to change demand (except on the margins where a go/no-go decision is made). As the time span gets longer various options come into play: car-pooling, vehicle selection, choice of commute distance, fuel switching. Most of these adaptive responses are on a time scale of years to a couple of decades. Sustained high prices will eventually reduce demand. We should think of elasticity not as a single number, but as a curve which increases as time since price-signal increases.

The ongoing global financial crisis is looking very ominous, and could lead to a deep and long global recession (if not worse). As far as peak oil and oil prices go, it seems to me this could postpone the "day or reckoning" by a few years and bring oil prices down a bit at least for a couple of years.

I agree with Smokey. I'm no economist, not by a long shot, but I do believe that we'll see some serious demand destruction in 08', especially the latter part of 08. I think it's nearly impossible for us to avoid a fairly nasty recession at this point with the current credit crisis unfolding. I've read many stories detailing how Americans are cutting back on their spending. Holiday spending is looking lackluster at best.

Also, this idea that China and India can continue their gangbuster growth with the big spending US in a nasty recession is ludicrous. Granted, we're not the mega player that we used to be, but we spend a ridiculous amount of money, more than we make in fact. And so with the major credit "haircut" we're in the process of getting, well, there's a lot of Americans who are just plain tapped out.

A potential credit crisis? I think not. The crisis is here and while it started out looking like credit there was a recent story here indicating that its a solvency issue.

It isn't that assets are stuck but rather a whole lot of stuff is way under water, sinking fast, and approaching crush depth. It doesn't matter if there is more credit - who is going to buy a presumed asset that might not only depreciate but depreciate at such a drastic rate as to suck the borrower under?

Knowing what is happening and why doesn't help today, at least not for me :-(

I struggle with this. I know my reading and research of the last 4-5 years has me ahead of the pack in terms of energy/human biology interaction. And what we write about at theoildrum is like a 5-6 sigma event - PEAK OIL - the vast majority of people don't know what it is or what monumental impacts it will have on society.

And now the credit situation. Am I smart enough to forecast TWO 5-6 sigma events that will both have monumental impacts on society?

A more likely explanation is that me, and others, LOOK for these 5-6 sigma events, and then construct evidence for them - this is how it would likely be seen to people outside this community anyways. If my doctor told me I had dengue fever, I'd be in disbelief. If he said I had ebola too, I might ask for a second opinion...

After all - there are thousands and millions of professional investors, who do a pretty good job of managing money (by historic rules) and the markets collectively are still up for the year and at multi year highs.

Still, as Stoneleigh mentioned to me, Peak Oil and the credit crisis are NOT independent events - they are linked by a Tainter-esque thread - that a social organization will expand complexity once a large energy subsidy is found - part of that complexity is scaling up of all sorts of 'maximum power machinery' - the leverage in the system to build more 'perceived power' in the form of digits. So I do see linkages between the two. I need to think on it some more.

Still, as Stoneleigh mentioned to me, Peak Oil and the credit crisis are NOT independent events - they are linked by a Tainter-esque thread - that a social organization will expand complexity once a large energy subsidy is found - part of that complexity is scaling up of all sorts of 'maximum power machinery' - the leverage in the system to build more 'perceived power' in the form of digits. So I do see linkages between the two.

I think this is an important point. IMO we would not have been able to construct the incredibly complex, globally-interconnected society we have now - including our complex-to-the-point-of-impenetrability financial system - in the absence of the fossil fuel boom of the last hundred years. Our fossil fuel production can no longer keep pace with the exponential growth in demand, partly due to population increase and partly to increasingly unrealistic expectations of a better standard of living for all.

Actually, I would argue that that has been the case since energy per capita peaked some 30 years ago. What has occurred since then IMO has been catabolic in nature. We in the rich world have increased our reach spatially in order to suck in resources from the rest of the world, and we have borrowed more and more from the future in order to maintain and increase our standard of living. (In other words, we have used an energy subsidy to drive entropy into reverse locally, at the expense of increasing it elsewhere.)

The implication is that we are already some 30 years into catabolic collapse, and that much of what we have called progress in the meantime would be seen in hindsight (from an energy-poor future) as converting capital to waste (negative added value), as most of it would be useless without cheap and reliable energy supplies.

The credit bubble, which is essentially global, is one manifestation of this process, and so is the extent to which we have canabalized our natural environment and that of others. That these should peak roughly coincident with net energy production is not particularly surprising. With net energy set to decline potentially quite quickly even before taking 'above ground factors' into consideration, and our ability to reach into the pockets of the rest of the world being challenged by a new power in the ascendancy, our ability to maintain our accustomed level of socioeconomic complexity is arguably beginning to falter. Limits appear to have been reached.

Of course financial affairs have their own internal dynamics (IMO grounded in crowd psychology - or herding behaviour - rather than rational thought) which interact with energy availability in highly complex ways. Concentrating only on energy availability in trying to understand how peak oil might play out would be far too simplistic - ignoring a vital level of complexity. It would also lead readers to believe that they had more time to prepare than they actually do, and to make only energy-related preparations despite facing a multi-faceted crisis. IMO those who are peak oil aware must also act to preserve capital in the short term if they are to be able to use their energy knowledge in the longer term.


I'm permalinking this one..Well said. But scary as hell because its absolutely plausible. You've connected another dot or two for me. FYI the GPI (Genuine Progress Indicator) that people at Gund work on peaked in 1980-1982 - about the same time as global per capita peaked. Have we really been borrowing from the environment and third world countries since?? Wow..Maybe..

This is pretty much the same conclusion I came too. We probably hit peak capacity and 50% URR back around 1995 but we where swimming in oil so in a sense peak oil was a missed event. Continued growth since the 1990's has really been based on this catabolic idea. In the sense that growth has come from refining our metabolism. Think of it this way most species ecosystems seem to collapse or go extinct once they have become heavily specialized and optimized for the current environment. When change occurs you get a sort of cascading collapse as the interdependencies take out entire groups of interdependent species. This fits well with my feeling that technical progress has been critical in driving up oil production and the economy for the last 20-30 years.

Intuitively it makes sense that we are too smart at exploiting our resources to be slowed down at only 50% URR for oil. Instead we should be able to run right till the very end. So I think that like every complex system in the past we will run as hard as we can right till we collapse.

This means if we really are only at 50% URR then we will grow until we hit 80% or 90% URR. But I tend to agree with Stoneleigh our resource peak is well and the past and only refinement has kept us growing.

Have we really been borrowing from the environment and third world countries since??

This is what empires always do once they have consolidated their hegemonic power (ie reached 'critical mass') - they draw in resources and concentrate them at the center, at the expense of the periphery. The concentration of resources (particularly energy) allows the socioeconomic complexity typical of empires to develop, further increasing their power to concentrate resources from wider and wider areas. It becomes a problem once this positive feedback cycle has progressed to the point where the voracious empire facing declining marginal returns to complexity begins to strip off more than just the surpluses from the vassal territories, and begins to consume their natural capital (catabolism).

IMO globalization has much in common with the subprime crisis, in that it is both catabolic and essentially predatory - a tool of economic subjugation facilitating the transfer of wealth to the centre through chronic indebtedness.


I've been interested in your comments for a long time and I value your insights. It's the overarching complexity of and interdependence of the multiple problems we're currently facing that's almost overwhelming.

It's easy to drown in a tide of detailed analysis, so one can't see the wood for the trees. I think we may be at the end of a socio/economic paradigme. The massive consumer/creidit bubble that has characterized the last thirty odd years of 'captialism unbound'. One could mention in passing the credit explosion, the housing bubble and the vastly inflated 'value' of the stock market.

We are apparently entering uncharted financial waters. We may be heading for a 'Mega Depression' where the financial/credit bubble bursts and 'equilibrium' is re-established and financial system 'collapses', returning to levels closer to 'reality' which existed before 'the beast was released'!

This is of course highly speculative and probably alarmist. We may, as usual, muddle through, but what if we don't?

Thanks writerman - your comments here have often made me think I'd like to read some of your books (although that would be difficult since I have no idea who you are).

Large credit bubbles have happened before (eg the Tulipmania, the South Sea Bubble, the Roaring Twenties etc) although this is the largest, which is unsurprising given the scale of the energy subsidy underpinning this one. What has typically happened before when a bubble bursts is a collapse and 'undershoot' roughly in proportion to the scale of the boom and 'overshoot' that preceded it. IMO bubbles can happen at all scales, but the largest ones are coincident with periods of hegemonic power (ie once the ability to draw in resources from surrounding areas has achieved a 'critical mass' and become a 'chain reaction'), because that power has the potential to 'add much more fuel to the fire'.

I would argue that speculative bubbles (the culmination of periods of unbridled capitalism IMO) are by their very nature catabolic - in other words, they have an underlying Ponzi dynamic and are therefore self-limiting. They essentially steal from the future as well as from their surrounding area of influence, hollowing out their own socioeconomic underpinnings in their final phase.

IMO the size of the bubble depends in part on the energy subsidy available to it, and determines the extent of catabolic potential. This would, in turn, be expected to determine roughly how long it would take for the area to recover to where it was before the manic period. This bubble - fed by fossil-fueled globalization - has led to catabolism on an unprecedented scale. Recovery could therefore be a long time in coming (and I would argue that when it does we will probably have seen a shift in hegemonic power to the Far East).

After all - there are thousands and millions of professional investors, who do a pretty good job of managing money (by historic rules) and the markets collectively are still up for the year and at multi year highs.

Nate, as I recall from my reading of Great Depression history, the 'groundwork' for the Great Depression was laid a number of years before the Crash of the stock market in 1929. That is, the farming and manufacturing sectors (especially farming) were on the ropes and the 1929 crash was like the last straw that rippled through the financial markets drying up the credit that might have helped the country weather the bad times that were coming anyway because of production sector problems.

It seems that now the same thing is happening in that the stock market/financial sector is the last to react to the actual rot that has been going on in the US manufacturing sector. The farm sector, inasmuch as it can ever (in the past 50 years anyway) be seen as being 'healthy' seems healthier than it was in the 1930's but I'm not that much up on it. The ethanol boondoggle and recent droughts can't have helped much, and there is the eternal encroachment of suburban development making the land more expensive than the farmers can afford.

Perhaps sometime soon, stock traders will actually look at what is going on 'out there' and panic and the market will actually crash again. Mind you, this is not a prediction, but it wouldn't surprise me at all if the financial sector went down the tubes and plummeted faster than manufacturing and farming already are dropping.

SCT, great turn of phrase, "approaching crush depth".

IMO, the Fed is freaked out about the potential for that crush. Don Sailorman (our resident lurker/sometime poster economist) has repeatedly maintained that the Fed has both the tools and the will to prevent a deflation form getting out of hand. I'm not so sure: their "Term Auction Facility" is a new invention. If their existing tools were sufficient, why would they be trying out new ones?

It does appear the real problem in the US financial sector is concealed solvency issues. More credit probably won't help, its probably time for the banks to do the writedowns and the Resolution Trust Corp be set up to transfer money directly from the taxpayers to the 'players'...

My point: it appears that up to this point that the OECD central banks don't seem to be able to stop the credit contraction. If they can't stop it, the resulting economic contraction will surely reduce oil demand. Lower oil prices and scarce credit will reduce investment in renewable energy. Sad news, but I'm adjusting my investments accordingly.

Errol in Miami

The reason why the Fed will always go with inflation rather than deflation: wages are inelastic, at least on the downside. Pay cuts are very difficult to do, even for non-unionized employers. What you tend to get with deflation, then, is not pay cuts but unemployment. Employers will lay off employees rather than cut their pay. The average US citizen does not understand economics, but they do understand that unemployment rate statistic.

I remember we had similar poll last year. I predicted $85 by year end, so it looks I should qualify as an oil prophet or something.

The truth is that I was simply lucky and I guessed the price but totally failed to predict the reasons. IMO this year it became obvious that oil (and other commodities) prices are more of a result of too loose monetary policy. Oil depletions role seems to be that it is putting a floor on the price falls which follow the cyclical run-ups.

So I think it all depends what Ben and the other central banks will do. Will they prefer near term pain in the name of long term stability? Or will they keep on inflating? My bet is on the latter. $120 by year end.

IF they tighten enough to get the inflation genie back into the bottle the dollar will go WAY UP, and a barrel MIGHT drop to $40, but it will not be going down much(if any)in absolute terms.

A reaction againts the decision of Iran of refusing payment in dollars for its oil, coulb be this:


In a recent conversation, I was trying to explain "what a barrel of oil is really worth" in terms of a thermodynamic analysis.

To use a simple analogy from the film Crude Awakening:
'A barrel of oil is roughly equivalent to the labor of 12 men for 1 year'

That's 25,000 human labor hours (12x40x52).

That's a simple 'starting point assumption' and it is rough.

So how much would one have to pay to feed and house 12 people?

Oh, at the very least, bunks in barracks, bowls of rice:
about $1000? That's a sort of 'concentration camp' equivalent of a barrel of oil value. Now if one pays even $1/hr for labor, then a price of a barrel of oil might be worth as little as $25,000.

From a thermodynamic point of view, oil is indeed grossly undervalued.

I know I have oversimplified matters to prompt debate and discussion.

These discussions about the 'economic' price of oil seem naive to me.

cf. "The Freezing Point of Industrial Society":

You would be better of comparing oil to say grain or wood or something. Using your $1000 dollar estimate for slave food to get the equivilent of a barrel of oil and assuming the inherent lack of efficiency in human labor ( we sleep eight hours). Then you figure oil is probably worth half of what your estimating so $500 a barrel. Next oil is energy not work and needs a machine to power to create something useful so again you could half the value of oil so $250.

So I think that $250 a barrel is probably close to the real value for oil right now if it was priced correctly.

But I'm not sure this is the correct way to value oil. For example the value of a grain crop can be calculated with confidence based on past demand but if you new that a devastating event was going to wipe out the grain crop for a region then the value of the last grain crop far exceeds its fair market value. People that are peak oil aware recognize this sort of valuation and from this perspective I'd say that 500-600 dollars a barrel is not unreasonable if we where facing a steep drop in production in the near future.

Of course the barrels of oil sold before such a drop will be viewed as having been sold insanely cheap. This leads into your sort of valuation but I think its a better way to put it.

I'm not just making up the figure of an energy comparison of a barrel of oil to human labor. 25,000 hours of human labor.

Now where can you buy that for $250?

On this figure of 25,000 for a barrel of oil, cf.:

www.phxnews.com/comment.php?cid=61315 or
www.theoildrum.com/story/2006/12/20/32057/145 or

Today, most of the physical work in the world’s economy is done by the fossil
fuels oil, gas, and coal. The increase in the ability to do work that came with fossil fuel is
almost incomprehensible. One barrel of oil contains the energy equivalent of 25,000
person hours of labor. The total energy used by today’s human population is the
equivalent of the amount of work done by 280 billion people (Price, 1995). It is as if
every person on the planet had about 50 “energy slaves” working for them (Price, 1995).
In the early 1900s, agricultural production was done by men with teams of horses,
sometimes as many as 20 pulling huge plows and combines. During the winter these
horses had to be fed and taken care of using food and land that could have gone to human
use (Youngquist, 1999). Today, fossil fuel energy makes it possible to run agricultural
Page 5
International Journal of Transdisciplinary Research Vol. 1, No. 1, 2006
Gowdy Pages 23-33
machines, produce fertilizer and pesticides to increase production, and cheaply transport
crops to distant markets. And machines do not have to be fed when they are not working.
By 1930 almost all the mechanical work done on U.S. farms came from fossil fuels. For
grain production in the U.S., labor input per acre has been reduced over the last century
from about 500 hours to 4 hours (Pimentel et al.,1999)

I think $25,000 for a barrel of oil is too high. Take the following replacement calculation:

Four people want to go 100 miles with a car that gives 50 miles per gallon. This will take them 2 hours and 2 gallons of gasoline.

Alternative: go by bicycle. This will take approximately 10 hours (allow for breaks and one tire repairs - I tried this once when I got kicked out of a train and had to bike the whole 100 miles with baggage in back etc.). 8 hours longer for 4 people = 32 hours. Divide by 2 gallons and get

16 hours per gallon. How many $$? Depends on how much the work is valued. Take minimum wage, then it's $96 per gallon or

$ 4032 per barrel gasoline

This would equal about $3600 per barrel cruder, something like that.

"One barrel of oil contains the energy equivalent of 25,000 person hours of labor"

The "Biologist's" example is not taking into account that this notion is an 'established' thermodynamic equivalent.

It is a measurement-comparison of energy.

But $4000/bbl is closer to 'correct' than $250!

I can already tell this subject deserves an article!

Oh, and if the answer is technology, then the question might be: In what way can we most swiftly use up the available fuel supply?

Economics is guesswork. Thermodynamics is real work.

Let's not get ridiculous here.
The old Stanley Steamers ran on once through water power. They didn't have big radiators, they just dumped the steam out the exhaust pipe.
Imagine you had an SUV or pickup truck with a ton of hot sloth grease in the back. It would boil water and run a steam piston. Not a turbine, not an engine, just a piston. Simple throttle control, no complex gears, etc, just a Ford 250 plus pickup truck with two seats, a ton of cargo capability, and a ton of phase change media.
Sure, it might only get ten miles, but that ten miles will get you to the next place you recharge your truck. Heaters will melt that wax in a hurry.
Course, they will demand so much current that you will have to run a direct connection to a kilovolt power line, but so what, power lines all over the place.

I'm in the $70-130 bin, which is where a lot of people seem to be. I think this is indicative of the fact that production has hit a plateau and no one knows what will happen. If demand remains strong, then things like hurricanes could cause price spikes.

On the other hand, the wheels are coming off the financial sector. Somebody is going to have to take billions in losses on loans that have no hope of being repaid. That's not a liquidity crisis, it's a solvency crisis. While I agree that mob psychology plays a significant role in the markets, the current lock-up is a perfectly rational response to the situation.

When problems in the financial sector spill over into the real economy (and the construction industries are already taking a beating), there is a significant chance demand will suffer. China is an export economy. If credit contraction causes US consumers to cut back, oil demand in the rest of the world will go down as well. Demand in China and India is not going to go up if Americans can no longer afford to buy tons of crap.

Ok folks - get a grip now.

Let's look at the simple facts, and let them determine other things.

1. credit has gone blooey.
2. oil is at or near peak - the distinction becomes less and and less relevant with each passing day.
3. India & China want more. Lots More.

So, do the math:

economic melt down = demand destruction = a longer plateau at present production, or, even better, an even longer plateau at reduced consumption.

If there's a massive recession, it will only keep more oil in the ground, and this soften the shoulder of the depletion curve, giving us more time to prepare.

So, where's the problem? (/snark)


I am hearing on the podcasts from financialsense.com that markets will tumble till mid 08, then markets are expected to rebound the second half of the year. And I am hearing also that oil will likely drop to the mid 80's and hang awhile but then will rise much more.

If there's a massive recession, it will only keep more oil in the ground, and this soften the shoulder of the depletion curve, giving us more time to prepare.

It could well keep more oil in the ground for the time being, but IMO this doesn't give us (as ordinary people) more time to prepare. The more oil is perceived as scarce (perception being more important that reality as far as determining the actions of great powers) and strategically vital, the more likely it is to be commandeered by central authorities for (pre-emptive?) military adventures.

Arguably Iraq is an exercise in keeping oil in the ground as a military reserve (while addressing westexas' export land theory by getting rid of inconvenient domestic demand), but such activities could hardly be said to cushion the depletion curve from the point of view of ordinary citizens.

I would say the opposite is likely to be true - freedom is expensive in energy terms, so freedom is curtailed when energy is scarce. The collapse of the credit markets is likely to result in a huge curtailment of freedom, due to the lack of money and credit. I would suggest that if you value your freedom in the future, then you would do well to preserve your capital now.

The more oil is perceived as scarce (perception being more important that reality as far as determining the actions of great powers) and strategically vital, the more likely it is to be commandeered by central authorities for (pre-emptive?) military adventures.

Telling the world about 'peak oil' is the ostensible leitmotif of sites like this, it seems... and I too feel a cultural need to spread new knowledge to the 'tribe'.

But inasmuch as large populations of humans are collectively semi-incapable of complex thought, just how well has this impulse been examined? It could easily be that the most precarious cascade hanging over our heads is that of humans going from BAU to helter-skelter mode.

Setting off avalanches can be a good idea, but best done with a bit of forethought. Here's a question to ponder, in a form I favor this week: If there was a button we could push to immediately convince everyone in the world that oil would soon peak and then decline forever, would it be a good idea to push it?

Or would the world be better served by new beliefs less rational but less likely to cause chaos?

Just askin'.

I have seen no more perfect anology for oil than that of Dinkel #8


" It's scarce because the Dickel distillery shut down production from 1999 to 2003, trying to reduce inventory of the Tennessee sippin' whiskey. It worked."

"The ad blames the situation on "an incredible surge in demand for George Dickel No. 8," but it's been known for years that the shortage was coming."

"You have to think 10-20 years ahead and think where the market will be," Carlsson said. "They are pretty much against the wall, victims of their own success." (and you thought the lead times in the oil business were long! :-)

"The shortage follows a glut of Dickel during the 1990s. A previous marketing plan ramped up production during a failed attempt to challenge Jack Daniel Distillery for Tennessee whiskey supremacy."

"Diageo PLC, the British beverage giant that owns Dickel, declined to provide production figures, citing competitive reasons."
(Where's Matt Simmons to help us demand "Whiskey production transparency" :-)



I have heard that oil in storage is at a peak.

That would tend towards declining prices in the future as oil output is ramped up to try and maintain income.

What if this works:

Bussard Fusion Reactor Funded

We will know in 6 to 9 months.

What would a published announcement of delivery of practical fusion reactors in 5 years do to the energy economy?

What would a published announcement of mining of asteroids for minerals in 10 years (using the above reactor for propulsion) do to the extraction economy?

My opinion? We are right now in a tight spot. We are no where near the death spiral that most here see.

In fact as I point out above, if a practical near term fusion reactor is announced, new reasons for pessimism will need to be found. They will be. (Great wealth eliminates aboriginal lifestyle. We will have to subsidize people to live like peasants. Except that poverty is something money can't buy. Real dilemma there.)

Ok lets say it works. Hell, lets make it create power too cheap to meter *wink*

1) Doesn't address 'peak Phosperous'
2) Is not a high-energy liquid (like oil) AKA not 'portable'
3) Does not address oil->material processes that bring us plastic, tires, et la.

We are no where near the death spiral that most here see.

The 'death spiral' is how others react - as some express it - a mosh pit with machetes.

What was the production problem of the 1920s?

Mechanization of everything had so increased productivity in a short time that there was considerable excess labor.

Please all TODers try to understand the depth of the situation. We can't even TRY HARD to solve energy-deficiency-problem because TRYING HARD itself needs energy :).

Best we can do is find as many acres of arable land as we can, purchase it now when its still cheap by selling urban property we own that is still expensive. As I told in my post that one acre can support only one person (2000 calories per day) if we only have to depend on rain as water source and can have one crop each year (long term world pattern as their is only one spring season in one year).

As an additional thing, try to live simple, consume less and spend more time with family, trade off your technical high-energy-living skills to regain personal skills especially knowing your neighbours and recognizing your relatives.

Lyrics to the song 'Suicide is Painless'

Through early morning fog I see

visions of the things to be

the pains that are withheld for me

I realize and I can see...


that suicide is painless

It brings on many changes

and I can take or leave it if I please.

I try to find a way to make

all our little joys relate

without that ever-present hate

but now I know that it's too late, and...


The game of life is hard to play

I'm gonna lose it anyway

The losing card I'll someday lay

so this is all I have to say.


The only way to win is cheat

And lay it down before I'm beat

and to another give my seat

for that's the only painless feat.


The sword of time will pierce our skins

It doesn't hurt when it begins

But as it works its way on in

The pain grows stronger...watch it grin, but...


A brave man once requested me

to answer questions that are key

is it to be or not to be

and I replied 'oh why ask me?'


'Cause suicide is painless

it brings on many changes

and I can take or leave it if I please.

...and you can do the same thing if you please.

A great idea having this poll. It forces us to think about everything involved and take a view of each and then put it all together. It does, of course, make it difficult to have a life outside TOD.
PO - we are probably quite close to a plateau but there are various taps and valves in the way of storage and spare capacity which can be opened to damp down extreme spikes.
Recession - we are probably on the way into one in the US and UK and other dwelling places of the derivatives wizards but complete economic collapse is still a remote risk.
Because of the growth in consumption during the past twenty years, we have a lot of spare fat we can trim off without serious damage. Restaurants, holidays, expensive clothes, most people can cut back on these as prices increase without a collapse in society.
Oil at twice the present price is still very cheap considering what it can do. Here in England, we already pay twice as much for petrol as you do in the US and people still have money to spend on Spice Girls concerts.
My conclusion - I think we are going to see a general upward drift to $150 in 2008.

Gerald Foley

i voted for the ~$150 option, although i could of easily chosen the 70-130 option also.
I believe that the price of oil will go up, as current prices are not sufficient to decrease demand, as (as someone else in this thread pointed out) there are many ways that people can cut back on their spending (holidays, new tv's, etc) which will be dropped in the recession times ahead. Of course these cutbacks will have an (indirect) knock on effect on oil consumption, but i would think that this would be less than the rather rapid demand growth that we are seeing in asia at the moment.

so - us, demand flat, perhaps down a few percent - Asia, demand up strongly, rest of the world, exports down a few percent - net price rise to meet the new supply-demand balance.

2c worth before i fall asleep and this thread gets too old.


Funny, hardly any mention of the food prices. They are going thru the roof and rapidly at that, yet almost no conjecture ensues.

I think everyone is trying to not talk about it.

There are two things about life.

You must eat and welll...the rest is just chatter and ego shit.

For those on fixed incomes each rise induces more and more pain...what many here call demand destruction.

Yes it will be destruction for todays folks have forgotten how to feed themselves. They relive on junk food and trash from the carry outs or eating out and letting someone else do the work.

I suspect that it going to perish in the new world order.
Flesh will begin to wither on the bones and we will have plenty of oil but it will cost far more than anyone can pay.

Meanwhile the Amurkan Empire quietly winds down in its continuing death spiral around the toilet bowl.

I sit here in rural Amurka and watch with a bemused eye as next years planting season slowly approaches.

I now live very low on the hog..(an old country expression meaning one eats the lower cuts--fatback,et--...and am surviving but its getting real nasty out there.

I can no longer afford the price of storebrought eggs and right now everyones chickens have quit laying for the winter.

My plans are to build a chicken house next year and start with a small clutch of fertilized eggs. Also beehives.

Maybe store some more of the wheat I will be hauling.

I have no opinion on all the other matters. To me food and shelter are the prime imperatives.

airdale-in the bluegrass

I chose the "Hedge funds and oil consumers are whipsawed between impacts of credit crunch and oil plateau -volatile range between $70-$130" option, but I don’t like the phrasing at all:
Being “whipsawed” implies that investor to be systematically on the wrong side of the oscillations.
Mere price oscillations in a range don’t fit the “whipsawed” concept.

Also, there is a wide gap between $150 already in 2008 and oscillations in the $70-$130 price range!

My bet would be for the average yearly prices to rise moderately (lets say, some 10 to 20%) in 2008, but maintaining the oscillating behaviour of the last few years.
But this very ordinary opinion does not fit in any of the poll choices!

Drip, drip, drip .....

For 2008, oil isn’t going to fall sharply and it’s headed up.

The world key movers and shakers, call them the Market Makers aren’t naive to peak oil and that their wealth is based on energy and growth. At “The Oil Drum” we are preaching to the choir when it comes to this lot. If you see the world from their eyes, move your money out of the US and out of the dollar. Asia is the future. Asia once needed America, but no more. They have internal inertia to keep growth up and the cash to stimulate growth in the regional economies, sustain their growth and protect wealth. It’s been going on for some time now … drip, drip, drip.

The US government has a role to play. The fed isn’t and hasn’t been doing anything to protect the people. It isn’t about protecting the people, it’s about the key banks and their wealth and the wealth of the Market Makers. It’s about protecting the thing that protects their wealth, the US military.

Since The Oil Drum opened the topic of Mega Oil Projects, put the US in the list of Mega Projects. We consume 20 mbpd. Need more oil; it’s easier to cut off consumption from a nation with nothing to give and that is taking everything. It’s easier to do that than drill in super deep water. Our 20 mbpd, now that’s spare capacity for a world economy to tap.

OPEC and others aren’t neive either. They, and other key oil producing nations, have been migrating away from the dollar.

With the sound of drip, drip, drip, the American Dream is being exported to Asia and it isn’t being replaced with anything at home. Sure, we can sell each other groceries and clean each other’s homes, but all we have is our minerals and agriculture to export.

The Market Makers will use Asia and the Fed to project their assets. When the dollar falls, oil and other commodities will rise. If the dollar rises, implied US growth will drive the commodities higher, too. It’s a no win situation.

Lets add to the guarantee of higher oil prices. Throw agricultural production into the mix. The world is peaking on wheat and other agricultural commodities. The southern hemisphere is in drought and the north has its share of it, too. Thanks to global climate change, we will miss our production yields and the prices of grains will keep going up as stockpiles continue to dwindle. Drip … drip … drip.

If you are in OPEC and the price of Ag keeps going up, you are not going to lower your price of crude. Crude and Ag are becoming, every day, more closely linked.

Add to that that even if the US consumes less and we go into recession, how do we dig ourselves back out to consume more? It takes energy to do it and we will never have that much energy again.

If the US consumes less, OPEC doesn’t have a desire to suddenly be making less money due to lower consumption. They will raise the price just to keep their income levels at their current level. …which is pitifully low to begin with for how large the cut of money is everyone else makes of their, economy driving, oil.

A word on have we are haven’t we peaked. Sure, the world may again be producing more and we may not have peaked, but demand is still growing faster than supply. It is the supply and demand equation that really counts, not peak itself. Sure, once peak is established in the record books, it will make things even worse, but until supply and demand come back into balance, oil prices are staying high.

I don’t have a crystal ball for 2008, but I don't think the price of oil is going to drop substantially. There are too many other fundamentals pushing it higher. If the Market Makers feel it time to tip the markets in their favor, which it appears they are doing, expect to have oil going up. Drip, drip, drip ….. before you know it, we have nothing.

You couldn't back up half the things you say. Did you just finish something by Chomsky? The drip, drip, drip thing is a bit overdone. You end by saying you don't have a crystall ball for 2008, but you sound from what you're saying that you've got it all figured out and know exactly which direction everything is headed in. I can't see what your problem might be.

I've been traveling, tried to post a comment a couple of days ago, don't think it took. Basically, I see a severe, not mild recession in 2008, imo most severe since depression and similar only to 1930's bank failures and worse than 1990 s&p failures, with market falling until tax day 2010.

Regarding price:
First, in the seventies, oil never went down y/y in spite of three recessions.
Second, Pitt claims avg 2007 price is 69/b. OTOH, somebody posting here thinks pitt is low, 2007 price around 72/b.
Accordingly, i pick the lowest price consistent with both, say 75/b.

1. Severe recession in 08, at least as bad as dotcom. Note in that case dow/s&p500 declined 50% in thirty months... as an aside, it seems that major problems take about thirty months to work through the system, past two recessions were 30 months peak/trough in the market, 33 months for the depression. IMO time to get back in is tax day 2010.
2. US recession spreads to europe, asia, s america, only oil exporters immune. Note that sub prime is already world wide, housing bubbles are even higher than us in parts of europe, chinese coastal cities. China in serious trouble, vast excess capacity built recently, loans cannot be repaid and meanwhile product prices, which they export world wide, will decline. Note also that a decline in their stock market last summer caused an immediate drop in ours... imagine if theirs went down 2/3 in a year...
3. Commodities crash, as is typical in recessions. Food may be exception but only if droughts, esp australia, continue, but I see oil declining sharply from here. As an aside, groppe sees an enormous amount of dd available at current price... since we are trying to predict near term price might as well look at what he says, he called for sharp drop when oil rose to 39, at which point most pundits were talking of 100/b.

Other possibilities:
1 Stuart sees at least a possibility of spike in oil production in 08, another 2+mb/d. This may be a mirage, a similar look a year ago might have shown a spike in 07, which did not happen, nevertheless at the moment the possibility should be considered... and meanwhile there is evidence that oil production is up, all liquids may be at record, 2mb/d new oil would slash price, no doubt opec would respond, but prices still likely to go lower.
2 Other credible po'ers continue to call for peak in 08-10... they may be correct, meaning dd plus higher production likely results in lower price - but by this I mean low prices from today, not lower that 2001 avg.

The fed cannot inflate because all they can do is extend credit... as in past crises, this option is useless when borrowers cant/wont borrow and lenders cant/wont lend. As is well known, banks are no longer willing to lend to banks because most banks are already recognizing loans, and are approaching the position (or are past it) where one more bad loan and they will have to recognize insolvency. No problem for depositors, fdic insures, but bank owners will not be amused. So, no new lending. Meanwhile, only borrowers with gold plated assets (or, better, borrowers who can prove they dont need the money), will be allowed to borrow; so, no new borrowers. The fed is powerless, ben and a helicopter was always a mirage, remember he has no cash, only credit, and we will soon appreciate the difference. "Pushing on a string' is what the fed fears, and we are there now.

This means, in turn, that no new cash will come into the economy, in fact bankruptcies/falling credit means falling cash. Nothing like doubling unemployment to 10% or so to slash workers need for higher wages. We are in for a period of deflation, exactly what the fed feared in 02, but this time low interest rates cannot avoid it.

Conclusion. Go to cash/treasury bills. Look at market rallies, there will be many until tax day 2010, as selling opportunities. Oils were great through end 07, and their time will no doubt come again, imo spring 2010, but not now. opec couldn't pump enough to bring the price down, now will have the tough problem of worrying about falling price and falling worldwide gdp.

Everybody should read roubini, my nominee for US money czar overseeing treasury/fed.

A last thought:
Some worried re: recession may be waiting for next tax year to sell stocks with good 2007 gains, eg oils. I am one of these, plan to pull trigger first hour jan 2 from a taxable account, will sell last of oils in ira next week.
Others with losses, eg financials, may have been hoping for recovery, but nevertheless may wish to sell this year to establish 2007 losses. We'll see if my shorts continue to do well as 2007 ends, skf, srpix and bearx