What is happening with oil prices ?

This is a guest post from anawhata.

"Oil is an incredible, irreplaceable gift of nature which packs energy in a dense, easily transportable form." - Jérôme Guillet – Energy Industry Investment Banker 

The hard facts

  • The world price of oil in US dollars has doubled in the last year (June 2007 to June 2008) from US$67/barrel to over US$135/barrel
  • The world price has gone up by 6 times in 6 years, from US$20/barrel in 2002 to over US$135/barrel by mid 2008
  • With hindsight we can see that the great cheap oil era lasted 16 years from 1986 to 2002 when the price was mostly in the range $15 – 25/barrel, coming off a $39 peak during the "oil shock" of 1980 (equivalent to about US$95/barrel in 2008 money). The short sharp spike seen at the end of 1990 was due to the first Gulf War.

Within Australia we have been somewhat insulated from the latest sequence of price rises by the falling value of the US$, so our petrol and diesel prices have risen by comparatively less as the A$ has climbed to around US95 cents, as shown in the chart below.

In Australian dollar terms we have seen the price of oil rise by "only" 3½ times in 6 years.

Obvious questions raised by the price rises are:

1. What has caused the startling rise over the last 12 months?
2. Why has the price risen steadily for the past 6 years?
3. Why shouldn't we get back to the $20/barrel we enjoyed in the 1990's?
4. What caused the noticeable dip in price from mid 2006 to early 2007?
5. Why does the oil price seem to be going up at an accelerating rate since the dip in 2007?
6. Has the price stopped going up yet?
7. What prices might we expect over the next 1, 3 or even 5 years to come?

Source: 1986 onwards - EIA monthly WTI spot price in money-of-the-day

Pre 1986 EIA Refiner Acquisition Cost of Imported Crude Oil in money-of-the-day

Starting with Questions 1 and 2, the accelerating curve of recent price rises is due to the growth in oil supply not keeping up with steadily growing demand around the world.

Oil is getting more expensive because surplus production capacity has diminished and continues to diminish, as shown in the chart on the next page. Oil industry volumes are of enormous scale (86 million barrels per day – a barrel is 159 litres), and the costs of supply infrastructure are in the billions and trillions of dollars.

Lead times for new industry infrastructure are typically 3 to 10 years. All new mega-projects on the production side are well known out as far as 2012, and few seem likely to boost global supply by enough to overcome declines in old oil fields. See the comprehensive listing of oil megaprojects at http://en.wikipedia.org/wiki/Oil_Megaprojects/2008. Note that major oil projects are developing a history of running late, often years late, as they encounter challenging technical difficulties operating in extreme environments like deep ocean or freezing Arctic conditions.

Rapid demand growth is often blamed for rising prices – demand growth in developing countries, particularly China and India, and in key oil supplying nations such as Saudi Arabia and Russia. But the decline of mature oil fields throughout the world is an even greater source of demand for new oil supplies than the growth of end user demand. Declining fields are losing 5.2% of total oil production per year thus requiring about 3.5 million barrels/day of new oil each year for the global oil supply to stay the same. (Nobuo Tanaka, International Energy Agency) http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=267. Recent annual growth in end user demand, on the other hand has not exceeded 1.5 million barrels/day.

The balance between growing capacity from new infrastructure investments and declining output from old infrastructure has seen global production capacity climb at a slower rate than consumption for the past 25 years, as shown in the following chart. 

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Source: Goldman Sachs based on EIA data 

Convergence of the two curves shown above indicates serious supply tightness over the last 2 years which explains much of the recent price surge, with perhaps $5 – 10 per barrel in volatility added by an influx of investment funds seeking a safe haven from the falling US$.

The analysis by Goldman Sachs in the next chart below suggests that price rises to date have already destroyed demand amounting to about 5 million barrels/day or 6% of current world consumption. Any further price rises may be expected to cause further demand destruction and consequent hardship for those being priced out of the fuel market. 

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This brings us to Question 3 – Why shouldn't we get back to the $20/barrel we enjoyed in the 1990's?

It's simple – the world has used up practically all the easy "light sweet" crude oil that used to pour out of desert sands for $3 – 4/barrel and be easily refined into saleable products. Discovery of oil peaked more than 40 years ago – see the chart below.  

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Not only is it costing much, much more to find and extract each new barrel of oil (typically $60/barrel for new deep offshore wells) but most of the oil we can now get is shifting towards "heavy" and/or "sour" grades that require billions of dollars of new investment in refineries to process them.

"The oil is getting harder to extract. Most oil comes from ageing, waning giant fields discovered long ago. There are no more giant fields to find, only lots of small ones, difficult ones or fields deep under the ocean. The remaining crude oil is heavier, thicker, dirtier, quite simply cruder! It's difficult to get out, expensive to get out, slower to get out. So, the rate of oil extraction will decrease." Michael Lardelli on Perspective, ABC Radio National, 26 June 2008

There is no going back to $20/barrel short of a world recession that shuts down demand for oil, and for everything else. 

Now let's look at recent price volatility. Question 4 – What caused the noticeable dip in price from mid 2006 to early 2007?

Prices climbed during 2005 due to Hurricane Katrina and fears of war with Iran, then kept on climbing until August 2006.

"Oil was in a bit of a bubble in July 2006. The way you could tell it was in a bit of a bubble was that speculators were net long by a large number of contracts (115,000) and inventories were high. . . . The oil situation now is very different. Speculators are now net short. Inventories are very low of the products and types of oil in demand." http://www.theoildrum.com/node/4227#comment-370311 – 26th June 2008

When the 2006 hurricane season passed without incident and oil supplies remained marginally ahead of demand the market appeared to decide that risks had been over-priced, and prices fell by $10 - $15/barrel for the start of 2007. Then they began rising again. 

Is our situation getting worse? Question 5 - Why does the oil price seem to be going up at an accelerating rate since mid 2007?

Actual oil prices are set by refiners bidding to buy tanker-loads. Recent media fuss about speculators refers largely to oil futures prices rather than actual spot prices for which a buyer and a seller have to actually exchange funds for a tanker-load of crude oil costing between US$100 and US$400 million. Not many speculators have this sort of cash or know what to do with a 250,000 tonne tanker.

This year many refineries have been finding it harder to buy oil of a grade they can economically refine, especially the 50% of US refineries located in the Gulf of Mexico who are suffering steep declines in overseas supply from their nearby sources in Mexico, Venezuela and Nigeria.

Mexico is in oil-induced political and financial turmoil because its one massive oilfield Cantarell has gone into rapid decline for geological reasons while Mexico's (subsidised) domestic oil consumption is growing. Mexico is seeing its largest single source of foreign income decline every month, while domestic demand for oil is growing at a pace that will see Mexico become an oil importer by 2014 according to some estimates. (http://www.theoildrum.com/node/4092)

Mexico’s Oil Production is Collapsing

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At the same time

  • Venezuela's output is declining, partly due to Hugo Chavez's ejection of foreign oil companies.
  • Nigeria's output has been reduced to its lowest level in 25 years by terrorist attacks from local guerrillas
  • Russia's output (which is only exceeded by Saudi Arabia's) has unexpectedly declined by 0.9% this year
  • Britain's North Sea oil peaked in 1999 and is declining at 5% - 8% per year.

The table on the following page shows, for oil exporting nations, net export declines accelerating from 2006 to 2007. Monthly data for 2008 shows that the overall downward trend is continuing. It is the declining volume of tradeable oil on global markets that is causing steep price rises this year when we are seeing only moderate abatement of growth in global demand.

More buyers are pursuing a tightening supply of exported oil, so small variations in availability are all that is needed to push deal prices upward. For example, on 28th June Bangladesh, hard-hit by energy shortages, was reported to have struck a deal with Kuwait for supply "at a premium price".

If declines in the supply of tradeable oil were not enough to create a tight market, buyers are reacting nervously to talk of attacks on Iran by Israel or the USA, and it only takes a rumour to send oil prices on another upward jump.

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Source: datamunger at http://www.theoildrum.com/node/4082/353705 using EIA data 
Units – thousands of barrels per day

Critically, Saudi Arabia appears now unable to perform the role of market stabiliser that it played from the 1980's until the 2000's on the basis of its known ability to pump up to 20% extra volume at short notice. Depletion of Saudi Arabia's giant oil fields appears to have taken away its ability to help the world in this way, though the Saudis will not directly admit they no longer have this power.

It seems likely that since 2007 OPEC has lost effective cartel power because few of its members have the ability to pump more oil. This means the cartel as a whole can do practically nothing to bring down prices even though key members like Saudi Arabia have much of their wealth tied up in Western economies and are clearly concerned about damage to their own interests if oil prices go any higher – thus the Saudi conference held on the 22nd of June 2008. 

So what happens next? Questions 6 and 7 – Has the price stopped rising and what prices might we expect over short-term and medium-term planning horizons?

Price rises did indeed pause in mid-June after an astonishing $11 run-up on Friday 6th June. Traders may have been waiting for an outcome from the Saudi conference on 22nd June, which was soon seen to have provided little new knowledge or cause for optimism.

Game on. Futures topped $140 for the first time on 26th June. 

So what will next week, next month and next year bring?

"Predictions are always difficult, especially about the future." Niels Bohr 

There are essentially two patterns of oil price prediction being made by informed pundits:

  1. Ongoing steady price rises driven by the continuing supply-demand squeeze
  2. A big discontinuity caused by demand destruction of a major sort, followed by a short period of lower prices then a resumption of ongoing steady price rises driven by the continuing supply-demand squeeze.

Pattern A – Ongoing steady price rises

Proponents of ongoing price rises are betting on geopolitical and economic stability and the ability of a resilient world to keep steadily adjusting to rising oil prices, as we have done for the past six years.

Typical projections of this type are from Jeff Rubin, Chief Economist at Canada's CIBC World Markets. The following table is from Jeff Rubin's April 2008 report http://research.cibcwm.com/economic_public/download/sapr08.pdf

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Two months later Rubin has revised his April price projections drastically upwards in CIBC WM's June 2008 report http://research.cibcwm.com/economic_public/download/sjun08.pdf . 

He explains "We are compelled to once again raise our target prices for oil. We are lifting our target for West Texas Intermediate by $20 per barrel to an average price of $150 next year and by $50 per barrel to an average price of $200 per barrel by 2010." 

Pattern B – Price moves down then up on a rising trend

The other school of oil price projections makes the common-sense point that serious demand reduction and perhaps economic recession in some countries will be triggered when oil prices reach a critical level – when "demand destruction" becomes really destructive. Proponents suggest that such a free-fall in demand from one or more larger consuming countries such as the USA will be dramatic enough to drop price back to, say, US$100/barrel for a period of time.

Some writers guess that the critical price point to cause such sudden and significant demand destruction may be US$200 - 300/barrel, based on percentages of world GDP, but the accompanying analysis is weak and the arguments published to date do not convincingly pinpoint a critical price for oil above which it cannot go. 

A graphic example of the "dramatic recession" school of price projections is shown below. Given the great variety of geopolitical events and economic factors that could influence actual supply, demand and price there is little hope for more precise forecasting of price and timing than the indicative story set out below.  

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Stay awake, expect oil prices to be in dynamic movement.

Conservatively, plan for US$200/barrel by 2010, but don't be surprised if a recession somewhere drops price back to US$100, for a short while, or sudden war in the Middle East sends prices skyrocketing.

Expect the fundamentals of fading supply growth and growing demand to push prices ever higher in the 5 year horizon, perhaps well beyond US$300/barrel.  

The implications in terms of Australian pump prices in A$/litre are shown in the table below. These pump price estimates are made on the basis of some reasonable assumptions:

  • Current excise and GST rules stay the same, keeping Australia's fuel taxes significantly lower than any other OECD country except the USA, Canada and Mexico
  • Australia's prices continue to be driven by average Singapore refined product prices. Singapore product prices are most influenced by the price of Malaysian Tapis crude which normally sells for a few dollars more than US West Texas Intermediate
  • Freight, insurance, wharfage and wholesale and retail margins rise only moderately with world oil price
  • A$/US$ exchange rate moves up from the current 95 cents to parity due to continued weakness in the US$ compared with commodity-driven support for the A$
  • No net impacts from the Emissions Trading Scheme which starts in 2010 and might add another 10 cents/litre.

Indicative Estimates of Pump Price

    Tapis price


    Australian capital city pump price A$/litre
    $140 (today) $1.68
    $200 $2.07
    $250 $2.45
    $300 $2.80
    $500 $4.30

"When you think a litre of petrol costs too much, ask yourself how much you would have to pay someone to push your car 10 kilometres." 

Finally, let's look on the bright side. There is plenty to like about moderately higher oil prices, if communities, businesses and economies take heed and get time and help to adjust.

Less traffic, less congestion and less pollution would be a big plus for most of us.

New business opportunities should spring up in areas such as energy conservation, Natural Gas conversions, cleantech industries, electric vehicles and freight optimisation.

Having the world place a higher value on energy from oil will change a lot of business decisions, improving our resource efficiency and enhancing sustainability.

Anawhata comments: The above is my effort to explain the recent history and possible outlook for oil prices to non-TOD audiences who lack awareness or understanding of peak oil. I think all of us know how tricky it is to explain these big issues to intelligent people who simply lack the basic knowledge we take for granted about peak oil. I have chosen to focus this piece specifically on prices, with the minimum possible mention of related causes like oil field reserves, depletion rates, the export land model and so on. Most of these topics underlie my argument, but are not highlighted because I will lose the audience if I stray too far away from the central topic of prices. I have anchored the whole argument around the undeniable facts of recent oil price history.

You will see TOD contributors' fingerprints and exact words throughout, and I hope I have credited key people correctly and sufficiently. In any case, TOD thought leaders, you know who you are. Thank you for educating and informing me and so many others. I welcome suggestions to clarify and improve the story, remembering that I have to keep it as simple as possible for a lay audience. In particular please help me correct any errors of fact or understanding on my part.

As PG would say, thanks for your support:


This is an excellent introduction to peak oil. I hope that you can update it at appropriate intervals over the next couple of years.

I have already dawn it to the attention of those friends and relatives whom I have so far not been able to persuade that peak oil is real.

Great read! I shared this with "Family First" Senator Fielding (Australia), for what it's worth. Afterall, he should be made aware of the concept of PO, shouldn't he?

Regards, Matt B

It'd be the first thing he's aware of, ever!

He is aware of "Recycling" (Although apparently not "Reducing" or "Reusing"...)

In the following pic, he has recycled the Black Knight costume from Monty Python and the Holy Grail.

Oil is an incredible, irreplaceable gift

electricity can power a car just like oil can

Amen brother. I'm glad most electricity comes from fairies and not something like coal.

"Amen brother. I'm glad most electricity comes from fairies and not something like coal."

just coal?

Yup, just coal and other fossil fuels. You see, solar thermal, wind, and whathaveyou in the renewable sector clearly aren't suitable for electric vehicles because instead of spending a few seconds plugging them in when we get home at night to charge over a 8-12 hour window, we would actually spend an extra ten or fifteen minutes going to a fast charging station, which would have to be built, just so we could whine about how we can't power a car with renewables due to problems with intermittency. ;)

Are you being sarcastic?

Electric motorcycle recharged from Solar PV...
Sounds "suitable" enough to me.

Just a bit. Besides, it's unpossible I tell you, unpossible! ^_^

John15, why do you keep harping about irrelancies?

Nobody denies electricity cannot theoretically power cars in spades in the future.

Further, it is theoretically possible that we can generate most of our electricity from non-fossil fuels in the future.

However, we do not live in the future. We live in now.

Now 99% of our car fleet in the world runs on fossil fuels.

Now, more than 60% of our electricity generation worldwide comes from fossils, most of that from coal.

The problem as you very well know is getting from now to the theoretical future in very rapid steps in a time of potentially declining net energy availability and restricted mobility due to decline in available oil.

Have you any idea about energy project finance costs, project completion times, finance deprecation times, car fleet replacement rates, PHEV mass-manufacturing capacities or electricity grid challenges in the real world?

Talking about a theoretical future where everybody is happy when we have 'such and such technology' generating us an abundance of cheap, non-polluting electricity, which we power our PEVs with is not only misleading, it is intellectually dishonest.

You have to face the reality.

Even EIA projects coal to increase annually 1.7% p.a. until 2050.

If you have some magic scenario how we can remove all that coal generative capacity in 20 year or so and replace it with cheap, clean & abundant energy of your choice with minimal risks, low financing, while growing economies and ensuring a win-win for everybody, then I think World Bank, IMF, UN, OECD, EU, US, OPEC, and the Nobel committee are all ready to listen to you.

And don't you think we don't want that to happen? Don't you think people don't want these issues solved?

But harping about theoretical possibilities and not facing the hard realities is not going to get things solved.

Instead of heaping criticism on someone without providing any numbers of your own, why don't you sit down, do the calculations and show it can't be done ?

I've never seen anyone do this using present day cost figures for CSP, solar PV/thin film, wind, biogas, geothermal, hydro and ocean power options and taking into account projected changes over the next decade.

I suspect you haven't either - so instead you indulge in a whole lot of hand waving and tell people to face the (unquantified) "reality"...


Gav, Please read again very carefully what I wrote.

This is not an either-or issue, we both acknowledge that.

However, in any fair argumentation, the proof of burden is on the one making the claim. I did not see a single shred of proof from John15. I did provide latest EIA AEO 2008 assessment for coal use growth up to 2050.

And you are right that the only calculation that I can refer to is the only publicly available high level calculation in the world that I know of, that of Hirsch et al.

I never claim it cannot be done (100% certainty).

I'm claiming the scale issue is very, very large and the time available for completion appears to be very short based on oil depletion forecasts.

My main point is the obvious thing that claiming it is theoretically possible does not make it so.

Theoretical possibilities are not realities until built.

However, having studied energy companies locally, I can attest that the average 5 year permit process, 2-3 year financing process, 7-10 year build time and the 10-25 year depreciation time does not make things easier. Especially when the industry is made ever more so confusing by constantly changing political winds and legislation, the volatility in the CO2 emission trading market and primary fuel markets (gas, coal, oil).

Please do not mistake me for a dichotomic doomer, because I'm not one.

Now, I've provided one very big study reference in this post.

Let's see if John15 can post one that backs his claims. One that is based on physical/financial high level calculations - not just lab-tech breakthroughs about algae and back of the envelope musings about how cheap pv is going to be in 2020.

Just saying 'it can be done' is as silly as if I had said 'it can't be done' (which I didn't write, if you read carefully again what I wrote).

*PS as for real-world solution: I am consulting both energy companies and politicians locally on this. That's what I mean when I say mere assertions get very little done.

Nobody denies electricity cannot theoretically power cars in spades in the future.

there are plenty of BEV in use right now as we speak. hybrids are electric and they are in use right now. it wasn't too long ago that people said hybrids were a joke and now they can't keep them on the lots!

The problem as you very well know is getting from now to the theoretical future in very rapid steps in a time of potentially declining net energy availability and restricted mobility due to decline in available oil.

did wind suffer from the huge drop in oil consumption in Denmark? those who offer answers won't suffer from from high energy prices because they are producers of energy.

Nobody denies electricity cannot theoretically power cars in spades in the future.

Further, it is theoretically possible that we can generate most of our electricity from non-fossil fuels in the future.

However, we do not live in the future. We live in now.

And in the now there is still lots of fossil fuels available.

In the future is when fossil fuel availability will decline, meaning talking about what can be done in the future is exactly what we're already doing.

Why is it wrong to talk about near-future solutions to near-future problems?

Actually John, no it can't. Power a car, yes. Like oil, no.

I filled up my people carrier yesterday - tank takes 80 litres diesel. Incidently would have cost £106.40 at todays price of £1.33/Litre, US$210, A$220. Wasn't completely empty so I didn't quite achieve the magic £100 fill up (yet).

Anyway, the point is that today I will drive approximately 750 miles - from central Scotland to halfway through France - with a vehicle loaded with people and camping equipment, before having to stop for fuel, provided I keep the speed reasonable.

Please provide us all with details of the electric powered vehicle which is in production, or even on the distant horizon, which can even come close to providing that kind of utility. Then provide details of the investment required, and the roll out times for replacement of the current fleet.

Please provide us all with details of the electric powered vehicle which is in production, or even on the distant horizon, which can even come close to providing that kind of utility. Then provide details of the investment required, and the roll out times for replacement of the current fleet.

the prius. probably a dozen or more hybrid and electric cars are going to be introduced in the next 3 years and that's not even including bikes and scooters.

and the roll out times for replacement of the current fleet

who cares? people can just drive less if they have to. I also question whether the fleet needs to be turned over. one could just convert an ICE car to an electric.

high school kids did it.


ups is using the zap.


Just in case you may have been fooled by the smoke and mirrors ... in reply to the question

Please provide us all with details of the electric powered vehicle which is in production, or even on the distant horizon, which can even come close to providing that kind of utility. Then provide details of the investment required, and the roll out times for replacement of the current fleet.

John15's only solution offered is "the prius" ... in fact, the Prius is powered by PETROL and emits 104g/km


John15 says "who cares?" ... I do for one, since it is important for me to know what the future can't be ... what is left is what might be.

Clearly, from John15's answers, an adequate number of affordable electric cars for the masses is unlikely in the immediate future.

IMO his other solution offered "just drive less" is much more likely (and is happening already) ... using less is otherwise known as a recession, it isn't BAU. Plan on that assumption.

OUCH!!!......John15 thats gotta really hurt!
A person asks what electric vehicle will travel 750
miles.....loaded with people and camping gear and luggage....and you say a Prius.

The example given is ridiculous - that particular requirement is a rare outlier compared to fundamental travel needs (though a Prius clearly can go 750 miles, and more fuel efficiently than a regular vehicle - though it isn't an EV).

Hybrids, plug-in hybrids and electic vehicles exist already and the car industry is rapidly shifting towards building them - true or false ?

Friends of mine have a Prius. They drove Brisbane to Sydney (913km) on 45L. That is great mileage of 4.6L/100km.

I just drove Melbourne to Sydney in a Prius. Similar distance, similar milage.

There's only ONE answer, TODAY.

We (the world) are, currently, producing about 15 Billion Gallons of Ethanol, annually. This production will power 30 Million Cars 300 BILLION MILES @ 20 mpg (500 gpy.)

That's TODAY! We can increase this by a facto or ten like rolling off a log.

What were those "TODAY" numbers for Electric, again?

Some concerns:
1) There were 600 million cars worldwide in 1997. Where do you get the 30 million number from?
2) even with 300 million cars needing power, fueling with ethanol gives 1000 miles per year per car. 83 miles/month. 19 miles/week. 3 miles/day. I cycle more than this.
3) Much ethanol production is dependent on fossil fuels for fertilizer and pesticide, and must compete with food production. Ethanol production is more likely to decrease by a factor of 10 rather than increase I think.

Ethanol can't be transported in pipelines, and freight railroads are already at capacity just keeping power plants supplied with coal and parts of California supplied with ethanol for 10% blends.

Sure it can. Morgan Kendrick is doing it in Florida, right now.

And making ethanol (even in the limited quantities available so far) has plunged 100 million people into deep poverty and created soaring food prices and made the danger of starvation real for millions more people.

Apart from that (and the fact it can only be scaled so far) its great.

I don't suppose you'd want to give sources for any of that would you?

Naw, I didn't think so.

I'd be happy to.

In the meantime please stop acting like a moronic troll - its a big challenge, but I hope you can rise to it.

Here you go:


How many more would you like ?

In any case, with the world population rising to 9+ biullion people in the coming decades, you can be sure that using cropland to produce fuel instead of food will increasingly be seen as an anti-social act.

There are better ways - clean energy and electric transport than pursuing the foolishness of first generation biofuels (my mind remains about about next generation techniques, none of which exist at any meaningful scale as yet).

I don't agree with a word that the ethanol guys says, but don't feel that abuse is appropriate.
It is particularly concerning when it originates from a moderator.

The guy was dishing out shit. If you're gonna dish it out, you gotta be ready to take a bite yourself.

Dave - as you well know (having experienced it many times yourself), if you abuse me, I'll abuse you back.

If you keep doing it, I'll delete your comments, and if you persist furher, you'll be banned.

In addition, you personally are no position to criticise others (though your holier than thou attitude doesn't surprise me one little bit, having seen that many times before too) having crudely abused many commenters over the last 6 months, for which you have been warned repeatedly.

You really appear to have no sense of irony in your disregard of site rules.
You allegation of my abusing others are unfounded - perhaps you would care to substantiate by showing anywhere that I have called someone a 'moronic troll' because we disagreed?

Yeah, well at least I'm smart enough to wait till there's actually a report before I start "quoting" it.

Guardian misrepresents coming World Bank Report.

It seems it was Transportation Fuels after all. What they, probably, won't throw in is the effect of Horrble Government Policies on holding land out of production (EU 10% of their wheatland, the U.S. 34 Million acres of rowcrop land, etc.) Export/Import Tariffs, Droughts in Australia, China, Argentina, etc.

Common sense should have told you that with Rice (Asian long-stemmed,) and wheat being the most commonly eaten foods on earth corn ethanol in the U.S. couldn't possibly lead to 75% price incrreases in food around the world. The USDA is probably about right with 2 - 3%.

And, yes, I was being a little snarky. If you think that justifies the moronic troll appelation (and, it makes you feel better) have at it.

Maybe you should have read all the links before shooting off half-cocked once again.

Here - I'll save you the trouble of clicking :

The G8's push for greater biofuel use has been a significant factor in driving 760 million people into food insecurity and putting them at risk of hunger in the past two years, ActionAid says today.

Released before next week's G8 summit in Hokkaido, Japan, the charity's report, Cereal Offenders, says the 82% rise in food commodity prices since 2006 has directly pushed 260 million people into risk of hunger as a result of the rich world's drive for biofuels.

Its report coincides with a warning yesterday from Robert Zoellick, the World Bank president, that the world is entering a "danger zone" caused by rising food and energy prices.

"What we are witnessing is not a natural disaster ... it is a man-made catastrophe. I urge the G8 countries, in concert with major oil producers, to act now to address this crisis. This is a test of the global system to help the most vulnerable and it cannot afford to fail," he said.

ActionAid's report comes as Professor Ed Gallagher prepares to release his government-sponsored review of biofuels, which may conclude that the European Union's ambitious targets for biofuel use may be misguided.

ActionAid says the huge thirst for biofuels is mainly a consequence of the targets and subsidies the rich world has put in place to build energy security. Biofuel subsidies to US and EU farmers are worth between $16bn (£8bn) and $18bn a year - four times as much as all agricultural aid to the developing world. It says the food crisis has come at a time of record harvests. In 2007, world cereal production hit a new high and is forecast to increase again in 2008.

Tom Sharman, ActionAid policy officer, said: "The global food crisis is creating poverty and hunger and it is being fuelled by policies and practices dictated by G8 nations ... The rise of biofuel production and the increasing impact of climate change coupled with an unparalleled decrease in agricultural aid are creating a triple whammy for poor countries."

Drought in Australia is something that happens (more and more frequently), which is why turning food grown elsewhere into fuel pushes prices up (and starves poor people).

You can't say its the drought that is to blame when good crops are being turned into liquids to burn in car engines, it just doesn't work.

Corn based ethanol is an atrocity, and pretty much everyone understands that now.

OUCH!!!......John15 thats gotta really hurt!
A person asks what electric vehicle will travel 750
miles.....loaded with people and camping gear and luggage....and you say a Prius.

frankly, I really don't care about a vehicle that can travel 750 miles on a full tank or whatever. we're talking about electric powered cars.

I would think TOD would ask why do you need to go 750 miles to camp?

From wiki link nos. in bold, they sound about right, in any case all numbers are pretty much jagged stabs in the dark - world, energy end use, 2006:

13% biomass - that means cutting down trees/plants and burning them, or using agri. detritus, minor. Cow patties! Turf I suppose falls with coal.

hydropower - see the infrastructure and the need for running water: 3%

geothermal, wind, solar, ocean waves: .8 % (point eight.)

other - tapping underground hot water springs, informal solar use such as drying fruit, %?

biofuels - ethanol, biodiesel, vegetable oil (eg palm oil), biogas - to what degree this production has an acceptable EROEI, what role the subsidies / infrastructure have, and in what measure they are really ‘renewable’ (not in a closed system anyway imho), and how much they use up resources that would be better used in a different way are all subject to *heated debate.* For that reason, even end use stats are useless, and coming up with some number is moot.

That is it, and it doesn’t look good. Solar might find some devp. if the will was there. Electricity is basically made from fossil fuels (though I didn't include nuclear, which is non renewable in the common definition...)

You could simply be in less of a hurry.

A spute hybrid is halfway there already, and nobody *needs* to drive 750 miles in a single day to go camping.

I strongly suspect that a Ford F150 would make a beautiful electric vehicle. Though as a conversion I expect it would lose some carrying capacity, it would maintain more than enough capacity for camping gear. In fact, a compact pickup would probably be even more convertible, and more appropriate.

Of course, if you want BAU then you are just going to be SOL shortly.

John15's only solution offered is "the prius" ... in fact, the Prius is powered by PETROL and emits 104g/km

a prius is a hybrid electric vehicle. and no, I mentioned more than just the prius.

To echo xeroid, THE PRIUS IS NOT AN ELECTRIC CAR. It's an ICE with a short-range battery-only facility. It uses as much fossil fuel, and certainly costs more to build and maintain, than the most fuel efficient diesel MINI or Ford Focus.

The kind of EV that could replace a 7-seater MPV with a 700-mile range is years away and will probably never be manufactured.

Once permanent oil decline sets in, people will barely be able to afford to wear-out tyres (tyres are made from a lot of oil and little bit of rubber), let alone use up scarce and extremely expensive electricity to footle about in cars.

Long distance road transportation will probably always be primarily powered by liquid fuel; fossil or - heaven help us - biofuel. It will be mostly confined to moving to goods and food, with buses for people in places where rail is impractical.

Mass car ownership - the phenomenon that pissed away a priceless legacy of fossil energy - was an artefact of cheap oil. It is already dying inch by inch at $140 a barrel.

Here in the UK, I predict that in 10 years time, most people will still be driving the same car they own today, or the next one they buy. They will use them rarely, when they can afford the fuel or really, really need to go somewhere.

If they're earning a lot more more than most, they may own a small EV for local trips. But most people - and this is what really scares today's car makers - won't bother buying a new vehicle. When people's income is down 25-40% (conservatively) compared to the cheap oil era; fuel costs per mile have quadrupled, and the relative cost of a new car has trebled, what are they going to prioritise when food and home heating costs are also much higher than today?

We can only maintain economies and lifestyles built on cheap energy with more cheap energy. Where is it coming from?

There is a super efficient electric vehicle on the market NOW. The TWIKE is made in Germany. The discovery channel show Daily Planet did a show that covered this one. I think it will be great for use in the city especially. When I can get one in Canada, I will try, but the 2008 production for North America is all sold out.

This vehicle uses no oil and requires little electricity.

Can someone tell me that this doesn't at least help with the problem of high gas prices? I realize that this vehicle needs to be mass produced.

For one thing, it has a top speed of 53 mph, and it costs 20,000€ for the basic version with the smallest battery pack. The 20Ah battery that gives a 100 mi range costs an extra 7,000€. Battery costs are prohibitive for any vehicle larger than, say, a 70 lbs Segway or electric bicycle. 18650 Li-ion cells are mass produced in the billions for laptop batteries. They cost about $4 each, and capacity is 2 Ah at 3.7v. The Tesla Roadster uses about 7,000 of them.

For comparison, a motor scooter like a Honda Elite 80 with the same top speed but minus the weather protection costs $2,400 and gets 70-80 mpg. If you can live with a 35 mph top speed, a 50cc motor scooter costs $2,000 and gets over 100 mph.

I'm part of what is probably a typical suburbian family.. a quick tally would suggest that between our two cars, we have about 6000 miles commuting and 3000 miles holiday/family visits travelling.

Clearly, replacing one of our cars with an EV of some sort for those 6000 commuter miles would drop out oil consumption a lot (perhaps >70% since the other 3000 miles are motorway-intensive).

As for what EV to get, I was looking at this:


So although you are technically correct that EVs are not currently a direct replacement for all car usage, for an awful lot of journeys they can act as replacements, especially for 2-car families.

Actually Hag, I've got one of those too. I've been commuting with it for four years, now I try to save it for special occasions like yours (wave as you pass through Lyon please!) -- I reckon I can run it for 15 years at least under those conditions.

And I won't complain about paying whatever price the diesel costs in 15 years' time.

But I sure as heck won't be commuting with it, or anything like it.

Dunno, granted it isn't fully electric but you might be able to go camping with a few people in one of these, eh? Might even be room in there for a few bicycles and kayaks for side trips.


Now imagine if the darned thing weren't shaped like a box and were designed with some basic knowledge of aerodynamics to boot? Nah, furgetaboutit can't have any of that new fangled idea of conservation and fuel efficiency now can we? Everybody must go out and get yourself a new 5.0 L Land Rover with all wheel drive and big fat mud tires and a giant winch for pulling tree stumps mounted on the front.

You wouldn't want to go camping by bus with your friends family and neighbors. Heck they might think you weren't a rugged independent outdoorsman, they might think you were a green socialist or something even worse.

Ride a Bike or Take a Hike!

This type of vehicle could get yourself, your family and several hundred of your closest friends from scotland to france, and you wouldn't even have to fill up when you got there. I suspect that one or two may even have been built over the years ;-)

today I will drive approximately 750 miles - from central Scotland to halfway through France - with a vehicle loaded with people and camping equipment, before having to stop for fuel, provided I keep the speed reasonable.

Please provide us all with details of the electric powered vehicle which is in production, or even on the distant horizon, which can even come close to providing that kind of utility.


Yes, it's a train; so? Is there some fundamental impediment to travelling by train from Scotland to France? My understanding is that you can make that trip today, although not all of the rail will be electrified.

If you truly need to travel into rural areas - and if you're going camping, you don't "need" to - then you could rent a vehicle at the end of your train journey, immediately cutting your petrol requirement to a small fraction of its former level. If the problem is only those last miles, it's much less difficult to electrify them. Miles Electric Vehicles has been building production EVs for years, and has an 80mph/120mile sedan planned for 2009.

Then provide details of the investment required, and the roll out times for replacement of the current fleet.

Electrified rail costs and benefits have been covered pretty well by Alan, so I'll refer you to his posts. The EV is targetted at $35k-$39k MSRP, which is a little under twice the price of a comparably-sized petrol sedan (Camry), but at US$9/gal in France, you'd expect to make back that difference after burning about 2,000gal of petrol, or about 50,000 miles of driving. Or much less, in a fuel-restricted world.

The rate at which the current fleet is replaced will depend enormously on what rate is required. Fuel is currently not that expensive, so I wouldn't expect rapid uptake, or conversion of whole car factories to produce EVs. By contrast, a fuel-limitted world would see much more demand for EVs, and hence much more rapid uptake. It's impossible to say with any real certainty how replacement would go in any particular scenario; however, one interesting thing to note is that 50% of US miles driven are accounted for by cars 5 years old or less, meaning that any rapid shift in the market will be reflected quite quickly in overall efficiency.

All sorts of things can make a car move, but really it seems silly that if I want to go from A to B I should use all that energy and pay all that money to drag a tonne of steel with me.

Electric cars are feasbile but high power equipment like trucks excavators fishing boats large ships the list goes on slill need liquid fuel!.

Actually, a lot of giant-scale mining equipment runs on electricity.

And electric trucks and SUVs have appeared too...


For regular vehicles, Tesla have announced an electric sedan to go with the roadster too now.


I think there are now something like 30 companies currently producing or trying to produce electric cars. This is the result of just a few years of high prices. What do you think the world's vehicle manufacturing industry will look like in 5 years time ?

In five years, not much different to today on the surface. GM will have gone bust. Chinese brands will be appearing in small numbers in Europe and elsewhere, just as Chinese small motorcycles and scooters are already doing in the bike market. There'll be a widening gulf between large luxury cars for those who can afford the fuel (and taxes), with low-cost, low-CO2, low tech cars for the increasingly hard-up majority.

Beneath the surface, though, the wheels will be coming off for many manufacturers.

With lower disposable incomes and reduced access to credit, their traditional customers in the West will have to save long and hard to afford new cars. All the time, the rising cost of energy will make cars more expensive to make and more costly to fuel when people eventually get together enough cash to buy one. Sales volumes will shrink and weaker car makers will go to the wall.

Unlike the 1970s, Governments have learned the foolishness of trying to keep dying auto giants going with public subsidies for the sake of jobs. In any case, the Governments will have their hands full just trying to keep the power grids up, food distribution going and public transport running.

By 2013 the descent down the other side of the peak is likely to be starting - snuffing out any last hope of a return to growth after the nasty recession of 2009-2012.

IF people have used the next few years to pay down debt, cut their energy use and, if possible, save some money, there may be enough liquid wealth available to prevent the complete decline of large scale passenger car manufacturing. I'm not holding my breath on that one.

The roadblock facing the car industry is not technical, it's economic. Even if the first few years of energy descent are not completely chaotic, private car ownership will be so far down people's lists of financial priorities that car makers will be a great place to lose money.

I'm with memmel and others who have posted here that it will be probably 30 years before a stable auto industry re-emerges that is suited to a steady state economy. I wouldn't be surprised to see one or two names from today still around, together some Russian and Asian brands that will emerge in 2015-2025.

Technologically, the vehicles and infrastructure will probably look pretty amazing but in most communities there will barely be one vehicle for each street, let alone two on every driveway.

The plug-in planned by Toyota looks far more economic than GM's planned Volt, which is over-specced.
To run for their planned 40 miles they need around a 16kwh battery, and lithium batteries currently cost around $1000kwh, so you are adding about $16,000 to the price of a car.
This is too expensive for most to switch.
The new Prius plug-in is aiming for a more modest 10mile all-electric range, so at around 4kwh it would come in at a more modest $4,000, and with mas production they are hoping to halve the cost of the batteries, and at that price they are more likely to have a mass market than the expensive Volt.
For the daily commute that would give an effective range of 10 miles, as they could recharge at work. That covers more than 50% of users even in the States, whilst those who drove 20 miles each way would still halve their fuel bills.

Advanced lead-acid batteries using capacitors to prevent deep discharge would be still cheaperhttp://www.csiro.au/news/UltraBattery.html
UltraBattery sets new standard for HEVs (Media Release)

Costs for those might run at $160/kwh, not counting the capacitors, so you should be able to get a good performance from less than $1,000 cost premium.

Power use might be around 6kwh for a 20 mile a day trip to work and back - around 300/watts/mile as you would not totally drain the battery.
So one GW of power generation would run around 4 million cars at this level of use, so for the 1.6GW nuclear plants 30 million Australians of whom half might run a car that would take around 3 plants.
Solar power might require an installed capacity of 2kw per car to make up for intermittency, and this and wind power would combine very well with a fleet of EV vehicles as the storage is taken care of.

The biggest problem is getting EV's built in time.
Toyota plan a million a year build by 'the early years of the 2010 decade'
Even with a ramp up of those plans due to continuing shortages of oil and allowing for the efforts of other manufacturers it is perhaps difficult to see more than 4 million or so being built a year by 2012, when the oil crunch will be well and truly here.

So can people stay mobile, also taking into account that most incomes will be much reduced?
It seems clear that much more modest electric bikes and trikes will provide much of the answer, with far more modest costs and power needs.

Hardly a case of carrying on trucking, but considerable personal mobility should remain.

Long-distance trucking is much more difficult, as batteries are basically inadequate for it.
To the extent that rail can take over this seems likely, and in the case of Australia perhaps some trucks could use natural gas - I am not sure how practical that is for large lorries.

Shorter distance delivery vehicles are possible within today's technology:
J Sainsbury plc : Responsibility : Case studies : Case studies - Environment

Rotating the fleet can't be done overnight though, so a lot of problems remain.

"and with mas production they are hoping to halve the cost of the batteries"

If this is the case then the GM solution is going down to 8k. Also tech improvement is probably going to be another 20% in a few years bringing the battery cost in the GM idea down to about $6000. This is ballpark what the tax rebate is likely to be on these cars.

As far as production constraints, there is no real reason that the industry can not switch over to total serial hybrid in 5 years. The only real bottleneck is likely to be battery production but the whole idea of ganged cells seems to lend itself to mass production. Whatever estimates being given by the car companies are likely their estimate of demand rather than what they could actually produce if they had the orders. I suspect that the demand response is going to shock even the most ardent supporters of the tech.

The US, up until this recession began was at a run rate of about 16 million vehicles per year. The heavy use driving fleet is around 100 million vehicles. This could turn over in 6 years once the ramp is in place.

At a premium of $16k over a petrol car, I can't see GM having the volume to drive battery costs down.
At a premium of $4k initially, Toyota will have.
Toyota is also going to be here in 2010, whereas it seems much more doubtful that GM will be.
If we were talking about a BAU scenario, I would have thought it would be possible to transfer most production to EV vehicles by, say, 2015.
We are going to be trying to do this though whilst coping with the mother of all recessions, falling incomes and high oil prices.
Under those disrupted conditions then I can't see production of more than a fraction of the current annual vehicle production.
So basically for financial rather than technical reasons I would see most of the production consisting of electric bikes and motorbikes.
France may be an exception to that, as demand for building nuclear power plants and its agricultural products may sustain it's economy far better, and it has a low cost base for electricity for industry from it's nuclear fleet.

Where will all of the electricity come from, what source?

Gas>LPG>Coal/Nuclear>Fast Breeder>Renewables>Fusion

+massive downscaling of demand.


Electricity certainly can power a car but I think it will take quite a while to replace even 50% of the petroleum-burning fleet. Modern civilization has been built on the assumption of cheap, abundant and never-ending oil (even though we have always known that it could not last forever). Most people live too far from their place of work - where they go each day to do their little bit to prop up the economy - to be able to walk or cycle. Decades of growth in private vehicle ownership has led to a public transport system only a fraction of the size necessary to replace cars. It currently would not be able to replace half of the cars in the cities or even a quater. A monsterous investment in bus services (which themselves use petroleum) and trains and rail infrastructure would be needed, costing many, many billions of dollars and probably taking several decades to complete.

As I see it, we simply aren't prepared for the end of cheap oil.

Very good article - a bit disturbing as well. I see the price of oil has subsided a bit as the dollar has regained a little bit of lost ground. Can't see it lasting though.

Electricity certainly can power a car but I think it will take quite a while to replace even 50% of the petroleum-burning fleet. Modern civilization has been built on the assumption of cheap, abundant and never-ending oil

1. the problem is people can just drive less. car pool or ride the bus all w/o having to do anything with the existing stock of cars.

2. modern civilization was not built on cheap and abundant oil. during certain times it was, and certain times it wasn't. that's a mute point with oil at $140(for now).

2. modern civilization was not built on cheap and abundant oil. during certain times it was, and certain times it wasn't. that's a mute point with oil at $140(for now).

I really like the idea of mute points. Good to practice with them now and again.

Yes! John is moot, but, unfortunately, not mute. Since he's either JD or an industry shill, Best Hopes for Both to Happen Soon.


I wouldn't go so far as to ignore the externalized costs of automobile use, and fossil fuel use in general. That oil may have been cheap to purchase a few decades ago, but it's marginal externalized cost via use in automobiles alone in the states as of 2003 was estimated at ~$270-1,780 billion. In the past, when oil was far cheaper than it is today, I imagine that costs in some cases were worse due to far fewer safety features and primitive emissions systems.

We're spending ~$585 billion per year on gasoline at $4/gallon, plus another ~$175 billion on new vehicle purchases, and at least ~$270 billion on externalized costs. On the low end automobiles in America cost ~$1.03 trillion bucks a year, and on the high end ~$2.54 trillion. It appears the efficient electrics ala the Aptera are ~20% more expensive to purchase per year assuming the same rate, at ~$210 billion per year, but would only require ~$50 billion per year in renewable energy costs, not to mention the reduction in maintenance costs and eventually the fleet rollover rate. Even w/ oil at ~$30-40/bbl during the good ol' days of 2004, the difference in costs would still be at least ~$450 billion and possibly $1,900 billion. Aren't we blessed to have "cheap" oil! ;)

That being said, I doubt Americans will enjoy giving up their perceived "freedom" on the road any time soon, regardless of what the costs are.

...and don't forget the body bag count because of being forced to go sort out whoever is using their new found wealth 'wrongly' with their new toys in the Middle East...


I've seen a few informal guesses as to how much that costs, but no one has included it in their papers AFAIK. Sufficed to say it would be huge, unless of course we devalue human life in the estimate. :(

My guess is that John is provided by the hosts of this
site.......much like a Pinata is provided for the
amusement of children at a Mexican birthday party.
John15: Have you ever seen those "bumper cars" at
an amusement park?
They have a metal pole on the back that reaches to
the ceiling to an electrical grid.
We can build an electrical ceiling over all the roads,
parking lots, driveways etc etc etc.
And we can eat cotton candy and ice cream and live
happily ever after while we watch Jetson cartoons.

Just ignore the kids John - some of them are a bit poorly socialised (not to mention out of touch with what is both practical and possible).

Ever seen a tram Neph ? I think they invented them about a century ago - they work quite well (in those cities that didn't rip them all out after GM and Firestone decided to destroy the industry).

As Nate always says, don't feed the trolls... He is plainly ignorant, man needs to read Tainter's or Jeff Vail's books or something then maybe he will get "it".

"It is difficult to get a man to understand something when his salary depends upon his not understanding it."

-Upton Sinclair

Yes! John is moot, but, unfortunately, not mute. Since he's either JD or an industry shill, Best Hopes for Both to Happen Soon.

JD's a katana to this guy's butter knife.

Kinda makes ya miss Hothgor, doesn't it?

He is plainly ignorant

Might I remind people of the Reader Guidelines?

"4. Treat members of the community with civility and respect. If you see disrespectful behavior, report it to the staff rather than further inflaming the situation.
5. Ad hominem attacks are not acceptable. If you disagree with someone, refute their statements rather than insulting them."

If you think he's ignorant, that should make it easy to refute his statements, no? If you're going to try, I'll refer you again to the Reader Guidelines:

"2. Make it clear when you are expressing an opinion. Do not assert opinions as facts.
3. When presenting an argument, cite supporting evidence and use logical reasoning. "

At another board I frequent an old-timer posted to beware of the commodity bubble bursting. He posted this:

Oil and most commodities as well as gold are at levels that are absolutely unsustainable in the long run because they are just too far above what production costs will be a decade or two down the road. In 2003, I asked SASOL what the cost was for producing one barrel of oil from coal. They told me it was 20 dollars.
Now that was then and prices for that have certainly gone up significantly, and they probably had written off a lot of their production equipment years ago, but in the long term oil will decline to somewhere around 60 dollars because it can and it will be produced synthetically.

I asked him how in the world we will have synthetically produced coal for $60/barrel. He hasn't answered me yet. Is this person way off base? and why?

Thanks to anyone willing to educate me.

The problem is scalability. The world can - and does - make some syncrude from coal and maybe that cost is $60 or even less. But if you tried to make enough of it to offset the declining availability of crude you would soon find cost escalations similar to those now being experienced by oil companies trying to bring up enough oil to meet demand. There may be a hundred or two hundred years of coal at current usage, but at a vastly acelerated usage coal would soon become much more expensive and scarce.

My modification of Tainters collapse includes the folly of simple substitution. We had cheap oil for 16 years because we substituted NG for oil in a lot of use cases this had two effects it kept prices low but it also ensured that remaining demand for oil was in a market with no easy substitution. I like to think of it as a compression phenomena like a spring we causes a compression with this event and thus the markets became inelastic. Where we substituted for oil electric generation etc NG became critical and oil became critical for transportation. But the reward was lower prices.

Next you set up a parallel depletion path i.e your depleting two resources and in time with population growth oil demand reached and surpassed the peaks of the 1980's. In addition NG demand increased dramatically.

Finally you hit the real Tainters collapse situation not from outright depletion but because we now need NG in the trasportation industry to help with substitution of heavy sour crudes for light sweet crudes but the previous round of substitution has eliminated this as a source.

Coal is no different we did the same thing substituting coal where NG or oil where too expensive. The current markets for coal need coal and demand is inelastic. Trying to things like CTL simply drives up the cost of coal.

Now here is the important part our society is dependent now on all three resources coal/NG/Oil and they are used in large amounts in critical areas. You cannot take from one of these sources without increasing prices this price increase is eventually passed on lowering consumer purchasing power.

You have zero net new money or GDP created. You simply shifted the expense from your gasoline bill to your electric bill. At first this might be a nominal win but eventually you reach price parity.

A perfect example of this is corn ethanol. Initially at least it nominally saved you money but it eventually drove up both NG and food prices and now your paying out more then if you had never done corn ethanol.

We are out of free lunches we have eaten it all.

Even a move to electric rails or electric cars is not free since it limits the area accessible by high speed transport. With gasoline powered cars you get a general rise in property values across a broad area while a electric transportation system favors denser population areas. You get a exponential drop off in desirability as you move away from the rail system. Even adding a EV commute plus rail does not help since your total commute times are significantly longer then driving a gasoline powered car. Also of course roads are horribly expensive and maintaining them for a few EV's when most people are using rail does not make sense.
The point is even this solution cannot keep property values from falling exponentially as you leave the rail lines. The changing desirability pattern alone makes it obvious that you would see significant deviations from the current pattern.

And of course all the various robbing Peter to pay Paul conversions generally result in higher costs anyway so purchasing power is going down. And its going down anyway because of resource depletion.

Bottom line no matter how you work this for the next several decades each succeeding generation will have less money to spend then the preceding generation. This will continue until we move to electric transport and renewable or long lasting (nuclear) electric supplies.

Once you are in the situation that the next generation can afford less debt then the proceeding one the party is over. You cannot take on a 30 year loan for a house expecting that in 10 years someone can pay you what you payed plus inflation etc. Your interest is not covered nor your principal payments.

You can't pay 20k for a car then 5 years later all a smaller amount of people can afford are 10k cars so new cars cost 10k your car you just paid off with interest is worth 1-2k.

Same for credit card debt.

Same for companies their energy costs go up each year and the eventual consumers purchasing power goes down each year.

Bottom line is our current economic system is dysfunctional and it should be obvious to everyone that its already dysfunctional. It cannot be saved by any known technology. The wedge to scale up a new technology and its costs coupled with increasing existing costs simply reduce purchasing power of consumers.

This is another important point substitution works only if it results in lower overall costs in the short run if your goal is to maintain the status quo or business as usual.

I argue that a transformation back to rail if you factor in the losses in property value and the direct costs does not meet this criteria so we won't do it without pain and we cannot do it fast enough without a national mandate to prevent current transportation costs from increasing while we transform.

Bottom line is we are going to lose a tremendous amount of money in fact we are basically going to lose everything we spent 70 years building and restart our economies from a level similar to that of the 1930's.

It will be 30 years at least before real GPD growth returns and it will be done in ways that are low energy.

And finally we cannot make this transformation without having to deal with the population problem.
Its pretty clear that if the average Americans wealth is reduced to the level of his grandfather that
the level of wealth in the poor countries is effectively zero.

This can be seen simply because once Americans are spending most of their incomes on necessitates they don't need most of the products currently sold via world trade or most cannot afford them. These export economies don't have in general a large enough internal economy to localize without tremendous hardship.

But the sooner we recognize that we need to write off our current style of living and convert to electric rail the sooner we can get back to having functional economies and more important by not burning up the last of our fossil fuels trying to transform without pain we may have enough to help the third world transition without undue loss of life. Population can and must decline but it can be done gradually with dignity.
We can feed our current population and if we create human policies that encourage slowing and reversing population growth then we can do better overtime.

I'm not saying life would be great in these third world countries it won't be good in the first world but its possible if we act decisively and quickly to convert to reduce the suffering by orders of magnitude.

Pussy footing around talking about EV's and ways to keep our current dead end economic system going simply condemns millions and maybe billions of people to death. The chances of keeping a stable society anywhere on earth under those conditions is zero.


Can you elucidate on "real GPD growth", We have followed a path of conspicuous consumption for the last century (with a couple of major breaks for population destruction), But as I look at it now there is no proposed philosophy for sustainable world development, Malthus was right, he just got the timing wrong in relation to humankind. In AU/NZ we have political systems that canonise the "family" and hence unlimited reproduction, but unless the human race gets a grip on the physical limitations of the world we will be condemned to an unending series of catastrophes.


Well for example most of the growth since about 1990 in the US was the result of financial manipulation.
Playing games with the financial system to blow bubbles. The dot.com ponzi scheme followed by the housing bubble etc. I'm not saying that the growth of the internet was not real and did not contribute but sane financial conditions would have probably resulted in a better more stable but rich and diversified result.
I work in computers and was a CTO of a dot.com so I know a lot about what happened.

Real GDP growth to me is increases in the standard of living without inflation.
Or you can define it as accumulation of wealth.
A simple example would be harvesting some trees for timber then waiting 100 years to make the next harvest.
And using that wood to build furniture and dwellings that last for 200 years or more.
After 500 years you have accumulated significant real wealth say owning several 500 year old handcrafted chairs.

Not you in the individual sense but society.

On the flip side temporal items such as a perfect pie are also wealth not some factory produced plastic wrapped garbage.

Industrialization created cheap imitations of wealth not the real thing as time wore on wealth began to mean bigger flashier more expensive guady baubles shoddily made with advertising campaigns and brand names far more important than the actual products which where mass produced. And then of course they either broke or where replaced with needless redesigns so your bauble "looked" old.

This however costs a lot in resources and energy and at the end when you run out of energy all you have left is the last shiny piece of crap built to the lowest standards that will crumble in 15 years.

Practically nothing we have today will last more then 15 years before it needs serious repair not the roads not the homes not the buildings etc.

The only thing Tainter and Malthus misunderstood is the concept of partial substitutions and specialization.

For example all the people excited about EV cars are complete fools. Adding EV's is simply partial substition they only work for a subset of the current use cases for gasoline but assuming we manage to succesfully pull it off which is doubtful this will lower the price of gasoline or stabilize the prices allowing continued use in other areas where EV's don't work. My best guess if everything went perfectly it would delay collapse by 5 or ten years at best. Eventually of course we will deplete the remaining resources and 5-10 years from now it will be even harder to change.

How I feel about EV's does not matter what matters is they are just a stopgap partial solution and we dig a deeper hole.

Its time to stop first and foremost because we have 6 billion people to feed.
Next we have 6 billion people who's descents hopefully less in number deserve a better life than us.
This means building real wealth.
Roads and rail lines that last hundred or thousands of years. See the swiss rails.
Sustainable energy and food etc.
Lasting structures that use passive and active natural heating and cooling etc.

Its time to start leaving our descents wealth that can pass through generations not a mess that self destructs every 15 years.

Thats real GDP growth. And certainly not stupid EV's which thank god this time we waited to long to build.

Now that I'm pretty certain we have waited to long to pull off another partial substitution and that we will hit the wall this time I'm glad we are doing it while we still have enough resources to change.

Probably for the first time in history the stupidity of our governments has accidentally forced us into a situation where we will have to change and confront the mess we have created. I'm thankful that people like me are ignored. If we don't crash we won't change but continue to dig an ever deeper hole that we may not be able to escape from.

Even if we managed to do some substitutions the added time is minimal.
Think about it the world uses 84mbpd the US uses 25mbpd if US demand went to zero.
The world usage would go up again exponentially I figure wiping out the gain from the US demand in less than 10 years. Substitutions that people are touting as saviors would at best reduce demand by say 5-10mbpd but incrementally. My best guess is this buys us a extra 2-3 years. Chinese demand alone plus a revived economy would dissipate the savings rapidly. This is the vicious dark underbelly of partial substitution.
I wish Tainter had seen it.

So for the most part I'm not worried about the proposed partial substitutions since they don't change our out come enough to allow us deplete our remaining resources a lot more. The good news is we will have to make changes with what we have and the better news is its before we have wiped out all remaining resources.
So despite our desires it seems we will have a decent chance to change. Like it our not.


Congrats on your point about NG substituting for oil. It's an enormously important one and deeply troubling. It seems highly relevant to the optimistic point sometimes raised about global economic growth continuing during the 1980s while oil consumption declined - as if the same will happen again.

Here in the UK, with oil and NG switching from domestically-produced abundance to imported, er, something less-than abundance, the NG issue is crucial. Like the citizens of Rome who waited anxiously for news of grain ships arriving from Egypt, will I soon need to phone my relatives in West Wales to ask whether they have sighted an LNG tanker from Qatar on the horizon?


The dot.com period was interesting to me in the fact that it was fairly obvious that nothing was created (everything was just shuffled into alternative piles) yet there was such excitement! Amazon et al just redefined how to do the same old thing.

I Think the EV enthusiasm is part of the grieving process, (denial?), I agree its not a solution it at best is like asking death to wait a minute. Even some of the activists ie bettertransport.org.nz I feel in denial, they are trying to use rail to solve the problem but have no notion that the whole Auckland area with its huge suburban tracts in unsustainable.

I'd not hold up swiss rail as an ideal, in my experience the Swiss are insular and obnoxious, they only exist in this way in the middle of Europe because the rest of Europe allows it, they keep everyones secrets. They have banned trucks on their roads, so the rest of Europe drives around them, no other European country could behave this way.

The other European majors have good rail networks and 'transport corridors' but more importantly their life is centered around their local area, they don't commute 100's of miles. But this has to be expected they have been doing this for many hundreds of years.

My 12 months looking into PO has opened my eyes to many things, but most what complete idiots
economists are, the myopia of the general public and the fraud of political movements.

The energy crisis, which has been telegraphed, but enthusiastically ignored will redefine our existence, let us hope that the period of denial will not last until the edge



I looked at the dot.com as nothing more than mail-order via electronic catalog as it was building. The experience our local bookstore that had to close because of massive scale money losing dot.com's was repeated all over.

You mention the fraud of political movements. My son mentioned he supported a pro-choice candidate. I explained that abortion is a red herring, energy will effect everything he does as is the bigger issue.

"The dot.com period was interesting to me in the fact that it was fairly obvious that nothing was created"

Thats a pretty remarkable statement from someone that is instantaneously exchanging ideas with people all over the planet....

"I Think the EV enthusiasm is part of the grieving process, (denial?), I agree its not a solution"

The math says that EV is completely a solution and is doable with todays tech. Note that GM's first production Volt has been announced and will be on view in early September.

If the US were to replace its car fleet with even this very first gen serial hybrid electric, approximately 75 percent of gasoline usage could be eliminated by about the energy generated by 100 nuke plants at about a cost of 200 billion dollars initial investment in the nukes and ballpark 2.5 trillion in the vehicles. Operating costs of the vehicles would well be under $1 per gallon equivalent.

The only thing peak about oil is going to be price and demand.


Whilst the internet facilitated the "dot.com" boom it is not defined by it, I speak from experience having used the internet pre HTTP, (Yes the internet existed before WWW).

The point with the EV "Solution" that you miss is that it is simple substitution, if miraculously the US managed to swap the ICE fleet for EV's you would be still commuting a 100 miles, and the energy demand would continue to grow.

Even the much lauded electric train falls into a similar category, even if they are 400% more efficient does this a) allow you to use 25% of the energy you did or b) travel 4 times further. The advantage for humanity is that you cannot make this decision on a whim.

The US consumes 25% of the world output because it had a head start, given that this will be taken away , which logic do you apply that will allow this continued imbalance?



I too was a user of the internet before www, mostly to get papers on cold fusion :)

If you swapped the ICE fleet for an EV fleet the actual energy consumption to move the same number miles at the car level would be about 25% of current. Electric motors are way more efficient than ICE's.

I've posted the calculations here a number of times and no one has refuted them. To drive the same number of miles that the US currently drives, using an EV fleet of the same battery tech as the chevy Volt would require about 100 nuke plants of 1 GW size. Why this seems to be pie in the sky and wishful thinking I do not know. In any event the economics are compelling and will drive this conversion unless there is political interference. If the argument is that we are going to vote ourselves back to the middle ages then I have no response. Other than that the technology and the monetary incentive will do their work.

I do not understand the ongoing confusion between peak oil and peak energy. Current nuclear power engineering plus current Uranium reserves (never mind new deposits and a huge number of new technologies (thorium, breeder and ultimately fusion) are enough to ensure plenty of new energy for a very very long time. Long beyond the current technology horizon. It is only a question of price and time, neither which appear to be a big problem.

To put the 100 nuclear reactors figure into perspective, China plans to have that number completed or under construction by 2020 - not including the mass-producible pebble bed reactors.
China Wants 100 Westinghouse Reactors - Business - redOrbit

Since many of them would be of 1.7GW size that is far in excess of the power required for an American EV fleet.

I have just noticed that I gave this link in the post immediately below- apologies.

If you swapped the ICE fleet for an EV fleet the actual energy consumption to move the same number miles at the car level would be about 25% of current. Electric motors are way more efficient than ICE's.

Actually, it's generally a little better than that.

The Lotus Elise gets 22mpg, while the related Tesla Roadster gets 0.2kWh/mi (incl. charging losses). At 36kWh/gal, the Elise is using 36/22 = 1.6kWh/mi, or 8 times what the equivalent electrical car is using.

8 times corresponds to 12.5% the energy consumption.

Of course, that will depend on how the electricity is generated and how much energy is expended in transmission (electricity) and refining (gasoline).

At the moment, 7% of electricity produced in the US is lost during transmission, raising the plant-to-wheel consumption to 0.215kWh/mi. Actual well-to-wheel energy consumption will range from 0.22kWh/mi (nuclear or wind/solar) to 0.5kWh/mi (42%-efficient EU coal) to 0.65kWh/mi (33%-efficient US coal). By contrast, the typical rule of thumb is that 14% of the oil is used in the production and refining process, meaning that the well-to-wheel consumption of the Elise is about 1.8kWh/mi.

Accordingly, in terms of total energy that needs to be obtained, the electric car will be between 3 and 8 times as efficient as the equivalent petrol car.

You appear to be arguing against a straw man. I am not aware of anyone who feels that we can seamlessly substitute EV's for ICE cars - they simply cannot be built fast enough.
To dismiss them therefore as worthless is to take an extreme and unsustainable position.
Even supposing that we can only produce enough to provide emergency service vehicles, a lot of lives could be saved by them.
The possibility of people using electric bikes and motorbikes you have also passed over.
It is quite true that maintaining the roads to present standards is not likely to be possible, but with less traffic that would not be needed anyway.
The US is certainly very car dependent, but that is an anomaly and it is hard to see how the still miniscule numbers of Chinese drivers being forced off the road would cripple their economy or make them unable to cope, although rising diesel prices will hit many of their costs hard.
Current plans for China include having completed or being in the process of building 100 nuclear reactors by 2020, and that does not include the mass-producible pebble bed reactors.
China Wants 100 Westinghouse Reactors - Business - redOrbit

And why, specifically, would France not be able to maintain its roads, or power electric cars to use them?

Hard times are indeed coming, but as always some areas and countries are likely to be relative winners, and are taking relatively effective steps in dealing with issues as they arise

"In AU/NZ we have political systems that canonise the "family" and hence unlimited reproduction,...."

in the us we have a tax system that monetizes reproduction. mccain wants to double the dependent deduction on fed income tax. the economic stimulus(aka consumer welfare) provided a $300 tax "rebate" for dependents that paid no tax.


In NZ we call it "Working for families", in the most cynical TV ad I've every seen the IRD (Inland Revenue) advertised this with a Father txting his daughter to come to dinner (she was in the same room but deafened by an i-pod), One of the child poverty action groups has now challenged this in court citing that it is unfair that non-working citizen don't qualify.

In the 70's we introduced the "DPB" the domestic purposes benefit, which pays single mothers to have children, the more children the bigger the benefit. When it was introduced some 8000 people qualified, now its over 100,000

We have a "Green Party" in NZ but I have no respect for them because they are watermelons, green on the outside, pink in the middle and hence support these socialist breeding programs, unless you address reproductive responsibility you can hardly quote I = P * A * T can you



arn't you forgetting Nuclear? What about Uranium / Thorium / Fast Breeders?

Prices of Uranium can rise a lot and it will not significantly impact the cost of the electricity produced.

The only reason more countries do not look like France is because they have failed to get their marketing of this energy source right.


I don't think they are really relevant right now. If NG gets to expensive we can readily expand our coal fired plants. The lead time to build them is fairly significant despite all the optomistic posts. If the economy is crashing and people are poorer they will conserve electricity esp if NG powered peak demand gets expensive.
Overall I don't see production of electricity being a real problem. Maintaining the grid however is a huge issue esp as we get poorer. Grid problems are common in the third world even on top of generation problems.

I put the condition of the grid itself way over generation post peak. I suspect a lot of people will find that their plugin-hybrid did not charge enough to get to work because the grid was down all night.

I know from experience they would not work in the second or third world at all and auto manufactures don't just build for the American market or soon to be whats left of the American market.

Auto makers might also build for the European, Japanese and Chinese markets.
There might indeed be problems with the grid, but most of the problems occur at peak use, and cars would be charged off-peak, so they would not make it worse at least.
There are huge possibilities to increase the efficiency of electricity use - air source heat pumps for instance would increase the efficiency of power used for heating by a factor of around 2.5 in existing buildings.
Nothing will work if we continue to make really dumb decisions, but given half-way decent policies most places at least in the developed world have good potential to scrape through.
Most of the electrical engineers who have posted here seem to think that the grid can be largely kept up even in the states, and it is in a lot worse condition there than in Europe.

The biggest obstacle for CTL seems to be scale. it is one thing to produce a couple of hundred barrels a day but it is entirely another if you want to ramp it up to say 10M+ BPD.

Oil prices have been histroically low because of the differnce between capacity and demand. (See the graph in the main post). If CTL can be scaled up so that the capacity always remains higher than the demand then in theory the price will be able to fall as all demand will be met. While that capacity remains at or even close to demand, the price must rise.

It really doesn't matter what the cost of production is $20 or $100. If there is an adequate margin to cover those costs as well as reward the risk involved in building a CTL plant then it will go ahead. The more margin of course, the better for the producer and they are hardly likley to sell it for less than the market price just because their costs are low. If that was the case Saudi could sell their oil for about $25/ barrel today and still be making money. I'll beleive your old timers theory of price setting for oil when I see the Saudis selling their oil on a cost + margin basis like he suggests the CTL producers will.

From an investor's perspective, currently CTL and coal fired electric stations are high risk in the U.S. due to uncertainty over fossil carbon regulations.


The absolute maximum given by optimistic EIA and IEA for non-conventional oils (incl bitumen, shale oil, tar sands, coal to liquids, you name it) is 6-7Mb/d by 2030. That's less than 10% of our global consumption today and c. 5% of projected demand by 2030.

If we go by those numbers, coal plus all other alternatives will not be more than a small relief over time.

As for the cost of production for oil, these graphs might help:

We are already at $60/barrel for costs and the FT syncrude has not materialized in spades. It likely never will.

However, as noted, this does not mean that the price of oil cannot go down for a while.

Coal to liquids ie being performed in South Africa (and has been for decades) and China (which is trying to rapidly expand production).


Australia has a few largish projects at varying stages of development too.


The main problem is carbon emissions and other pollution rather than practicality. Its worth bearing in mind that it takes years to develop these sorts of projects and oil prices haven't been above $60 all that long - and its only just dawning on people that high prices are here to stay.

I'm in complete agreement.

"When you think a litre of petrol costs too much, ask yourself how much you would have to pay someone to push your car 10 kilometres."

While you are at it, think about how many people you'd have to pay to push it at 60 kph, and...

... how much extra food you'd have to eat to walk 10 kilometers.

... how much extra food you'd have to eat to pedal a bike 10 kilometers.

... how much extra dog food you'd have to buy for a dog that will pull a wheeled sled for 10 kilometers.

... how much extra hay (never mind stabling costs) you'd have to buy to feed the horse that takes you 10 kilometers.

... how much surface area and how much time you'd need (never mind capital costs and embedded energy) to gather enough PV electricity to power a battery powered bike or car for 10 kilometers.

Dogs and horses are excellent traditional systems for transforming agricultural productivity and food "waste" into locomotive power.

People of course can do that too, but their locomotive potential can be multiplied with an animal. That was the only way, before the bike. The bicycle, invented just before the dawn of the automotive age, was a revolutionary invention whose potential was in effect stunted by the automobile. In the future it will enable people to turn food into locomotive energy on a much larger scale. Food is biofuel... when you run it through the stomach of a horse, dog or human being. Bikes enable food energy to be transformed into locomotive power with even greater efficiency.

Of course when you start to concentrate it for use in nonbiological energy systems (cars, airplanes) you can multiply its power... at the cost of competing with eaters... and at the cost of destroying global ecosystems.

Bicycles are 900 mpg vehicles if you use an equivalent food calories for a calorie of gasoline..

What if you have several people on the bike/rickshaw and just one person pedalling, would you get even more mpg?

How many mpg per person if several people are on a motorbike or electric scooter?

I interpret Jerome's comment about oil's value as in part: why are we wasting this precious resource on mundane things like daily trips to the grocery store or even cross-continental trips that are more convenient because we can do them in 750 mile stages rather than 300 mile stages.

Electricity is the way to go given the ease with which we can convert renewable energy (or nuclear energy) into it and the relative efficiency of electric motors as opposed to internal combustion engines. The latest post on my blog: www.greenthoughts.us (shameless blogvertising) suggests that we can electrify rights of way until such time as mobile electric energy storage gets cheaper and capable of making that people carrier journey more convenient with batteries or ultracaps.

I couldn't resist posting this to the "anz" OilDrum. If I'm not mistaken, Bloomberg Television interviewed a member of the Australian Association for the Study of Peak Oil and Gas for the very first time. The video can be accessed on the right side of the page here: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asZil7JHNxT4

Thanks ziggy !

Excellant article, without the usual bias of the Western Oil "experts"!
The Goldman Sachs observation that high oil prices had reduced demand over last 6 years by 5 MBD is not believable. Afterall major portion of the demand growth in the recent past had been from China, Saudi Arabia, Russia and India and none of these countries had slowed down their consumption. It will be interesting to know where this drop of 5 MBD of oil had taken place.

I'm not sure I follow.

I think that generally during times of strong economic growth material demand pretty much consumes the available supply - prices remaining steady.

But prices did not remain steady and the supply didn't grow.

In this regard I think the Goldman number is purely hypothetical and silly.

However, had we $20/barrel oil now, plenty of supply and strong economic growth, I'm sure we would use much more than 86Mbpd.

Consumption in the OECD countries has been flat to down over that time. The assumption is that at $20/barrel it would have gone up. The same for consumption in the poorest countries. The absolute numbers are small there, but the percentages are big.

The Goldman Sachs observation that high oil prices had reduced demand over last 6 years by 5 MBD is not believable. .... It will be interesting to know where this drop of 5 MBD of oil had taken place.

For many years with BAU the world consumed ~1.6% more oil per year, but for the last 4 years production has been essentially flat at atound 85 mbpd.

So the high prices in recent years appear to have destroyed (1.6% of 85) x 4 = ~5.4 mbpd, so I agree with Goldman Sachs.

What little oil the world's poor people use is mostly used to grow food. If the wealthy people aren't driving less, the poor people are probably eating less.

John15, I have to ask - have you been sniffing petrol?

Trying to brush off the point about the difficulties involved in switching from mass private vehicle usage to another mode with "people will just drive less/carpool" displays a complete lack of reasoning. People will reduce discretionary vehicle usage but that's about it - they can't stop going to work/shops just because fuel is too expensive. And if you thought for more than a few seconds you would conclude that carpooling would also have it's limitations. Driving around to pick up passengers might reduce overall vehicle miles for many people only marginally or not at all. What about dropping off young kids at school and picking them up again?

People will just take the bus? Are you SERIOUSLY suggesting that existing public transport infrastructure can handle such an influx of people. Just how many more people do you think can fit onto existing bus services in say, Brisbane?

Lefty - please use the "Reply" link when replying to someone else's comment rather than starting a new set of comments, which creates a lot of confusion.

As far as switching modes of transport goes, adding new buses to the system can be done relatively quickly (much more quickly than building rail, which is the better long term solution).

And of course, people can just move closer to their jobs and start cycling or walking to work. This has a massive impact on their fuel consumption - and will make them happier and healthier too.

I did it years ago. Everyone else can too if they try hard enough - or start a business near to where you live if you don't want to move and can't find a suitable job - employ yourself...

Gav, I'm not sure I follow you here.

Exactly how many more buses do you estimate a city would need for the twice-daily moving of say, half-a-million extra people? Remembering that it isn't a steady stream but that there are several peak periods a day. I'm not sure how to calculate a really accurate estimate as there would be quite a few factors to take into account but I'm pretty certain it would be in the thousands.

Care to put a cost estimate on the purchase of even a thousand buses? Hard to imagine it being much less than say, half-a-billion. Even if you have that much, how quickly could that many heavy vehicles be delivered? And this may well be only a fraction of the number you would really need. And we're still only talking about a single city.

I'm only going on the figures and graphs thrown around on this site, many of which appear to suggest that the world is at the verge of a real petroleum supply crunch. How long might we have to raise that much capital to purchase and implement transport solutions on this scale?

I'm not convinced that most people can simply move to within walking or cycling distance of their workplace, switching homes in some giant game of musical chairs. The average price close to my workplace is more than double what I paid further out in the sticks. Think of the effect of large numbers of people trying to move close to town as oil supply - booming demand squeezes supply and bids up the already grossly inflated price of housing. The value of further flung suburbs shrinks but there's no point buying out there because the cost of driving into town starts to become prohibitive for many people as fuel continues to spiral upward. Outer suburban slums on the horizon?

And we haven't even talked about trying to borrow money during a credit crunch or recession.

I have been impressed (and worried) by this site but I feel the answers I have been given here are over-simplistic.

A bus can hold 50 people. So that 500,000 people could be carried on 10,000 buses all at once. Given that during a typical peak period of a couple of hours, that some buses could do round trips, that most people won't be on the bus for the whole journey from one end to the other, and you'd be looking at something like 2,000 extra buses.

By comparison, Australia last year bought one million private cars, and according to the ABS, in 2003 we had 70,122 buses nationally, in 2006 some 75,375, and in 2007 there were 77,548. So we're adding a couple of thousand buses a year without drama.

I'm not convinced that most people can simply move to within walking or cycling distance of their workplace, switching homes in some giant game of musical chairs. The average price close to my workplace is more than double what I paid further out in the sticks.

But if moving could let you get rid of your car, then you could still be ahead financially, especially given continually rising fuel prices.

Of course if you are the sort of person who would never get rid of their car even if they lived next door to work, then it won't help you much; but we're talking hard economic facts, not sentimental attachments.

And for buses to move the working population of Australia? Plus millions of schoolchildren? I think you'd be looking at moving 15 million+ people. 60 000 odd buses if the original figure is accurate. If you can prove that purchase and delivery of that number of heavy vehicles is doable in a reasonably short space of time, then I'll believe you. Let's not forget that buses drink petroleum as well.

As for moving, I have no intention of packing up and leaving the nice quiet little place I have called home for a decade, with my vege garden and orchard (which is helpfull in the face of rising fuel/food) unless circumstances force us.

With the price of real estate in town, fuel will probably need to cost more than $15 a litre for such a move to put me ahead financially. If it gets to that stage I - like huge numbers of other people - are unlikely to have a job to go to anyway. And that's a hard economic fact.

Schoolchildren already go by bus (or walk, or cycle). If they don't they should. The number of valid exceptions to this is vanishingly small.

How many working people currently drive to work (and don't already bus, or train, or cycle, or walk) ?

How many of these can't move closer to work or find a job closer to them ?

Thats how many people you need to buy new buses for (divided by the reuse factor over the peak period) - not 15 million.

The new (long - more than 50 people) buses in Sydney cost around $100k IIRC. Its a fairly surmountable problem if you ask me.

As far as petrol drinking buses go - you can also get gas powered buses, you can get hybrid buses, you can get electric buses (see the Adelaide "solar bus") and you can even get hydrogen buses - one of the few examples where the stuff is useful.

High fuel prices will drive urban consolidation - more apartments and high density hosusing closer to urban centres and transport routes.

the adjustment will take a couple of decades to work through.

Large houses in semi-rural areas will be for retirees, permaculturists and weekenders for the rich - and for those who buy electric cars. I suspect in 20 years time that will be a large proportion of the population.

Gav and Kiashu,

I don't disagree with your vision of more compact communities where people live within walking/cycling distance of work or more likely, use a greatly improved public transport system.

I do think that you are underestimating the difficulties involved in moving to this.

I live near (at least it used to be near when fuel was cheaper) a resource town on the CQ coast. There are about 5 smaller communities surrounding the town in a 40km radius, one of which I live in. The total population of these communites together probably comes close to the population of the town itself. The bulk of the people in the communities work in town as that is where most of the jobs are concentrated. To consolidate this to cycling distance (walking would still be practically impossible), you would need to squeeze nearly double the amount of people into town itself.

But the town is full. You can't squeeze large numbers of people in because there aren't the dwellings in existence. So few people here can currently move closer to work just because you did. You would need to build a whole bunch of high rises/high density housing and unless you were going to knock down large numbers of existing homes, they will have to go out on the periphery, way out of walking distance and probably out of cycling distance for many. It might be possible if we greatly expand the just about non-existant public transport system here. But you're still talking about re-engineering a town and allowing the surrounding communities to become ghost towns. For Christsakes Gav, don't come back with "it'll be a walk in the park" because it won't be.

The only way people here can stop commuting to work in cars is to create an effective public transport system which we currently lack, that can more 50 or 60 thousand people every. If that happens, I will use it.

You need to think carefully before insisting that everyone should just walk/cycle/take the bus/train becuase such options do not exist for plenty of people around this country.

Hi Lefty,
The only way I can see that working is with buses running to the town from the satellite communities, so that you walk, ride a bike or scooter to the bus station and get the bus from there.
In time some business's might relocate to one or other of the satellite suburbs - in the UK this is pretty common, due to the density of traffic and the problem of getting across town in it.
Looking on the bright side though, the coming recession will likely solve quite a bit of the problem of getting to work, as many won't have jobs to go to.

Gday DaveMart.

I agree about the buses. If it turns out AFFORDABLE then it might be do-able and I would gladly participate. A lady I work with bought a scooter about 6 months ago and boasts about not having noticed the fuel affordability crisis. If you live relatively close to work (as she does) then they are a pretty good idea.

Unfortunately, I don't think a lot of businesses will relocate out here though. Heavy industry employs the bulk of the workforce so you can't relocate a power station, a port and loading facilities and half a dozen raw material processing plants.

And I agree about the recession. If the Australian resource sector goes under, there will be plenty of empty houses in town. Of course that will hold true for the communities as well. Looking a little grim long-term methinks.

cheers mate

Even if you don't live close to work if the choice is a long and uncomfortable ride or not having a job, then the scooter wins.
Standards are going to change, and what is unacceptable now will become commonplace.
When I was a boy my father worked in the dockyard in Portsmouth, and we lived in an estate several miles away.
He cycled like all the other guys, and that was on a big, heavy old sit up and beg bike.
When it rained he got wet, and when it snowed had to watch he didn't skid.

I agree, those options don't exist for everyone in Australia.

But they should.

And it's not like we can't afford it. My state just built EastLink, 45km of road for $2,500 million. With $2,500 million I could
- buy 2,500 buses @$100,000 each = $250 million
- pay for three drivers for each to keep the things running 120hr a week, 3 x 2,500 @ $50,000 each = $375 million annually
- put $1,875 million in the bank at 8% giving $150 million in interest to pay for maintenance ($25 million) and go towards wages for drivers ($125 of $375 million)
- this leaves $250 million wages to be paid, and the fuel. If each bus carries just 200 passengers a day (typical loading is 10 passengers per trip in a poorly-serviced system, and they average 20 trips a day) at $2.50 each (500,000 passengers/day for the fleet), that's $456 million, so that we have $216 million to spend on fuel.
- a typical bus travels through city with starts and stops at 20km/hr, so that in 120hr of travel weekly it'd go 2,400km. Typical fuel efficiency is 33lt/100km, so that they'd use 792lt weekly each, or 103Mlt for the whole fleet annually. They could thus pay up to $2.10/lt for their fuel before requiring any subsidies.
- All this carrying 500,000 passengers daily, with a very spacious and relaxed 10 people on the bus at any time; in better systems, they get four times as many passengers, which would give the bus company profits for expansions, or could be returned to the general revenue, etc.
- and with all this, bear in mind that of buses, trams and trains, buses are the most expensive and least energy-efficient in the long term [from here, we see that buses are only 3x as energy-efficient as cars in the present crappy system, trams 6x, and trains 17x]

So these things are quite doable, require no greater spending than we're already doing on transport, no great technological advances, etc.

Hi Kaishu,
There are lots of good reasons for expanding the bus, rail and tram systems in cities. However, while the minimum wage is $15 a hour,even if mass transport was free, if it takes an additional hour per day to travel across the city making 2-4 changes, then a 60 km round trip in a car using 3L fuel is going to be the preferred option. The scary thing is that fuel will have to go to >$5/L for that to change. Car-pooling can be a good option with work colleagues even if living 10-15 mins apart.
Ten years ago, on a 3 month sabbatical in Sydney, I did commute across the city and it was a 2hour trip each way, 4 hours traveling a day starts to cut into your life even though I enjoy reading. The waiting between transfers was the worst, especially at bus stops, inches from cars and trucks, hoping that the next bus is yours and that it will stop.

We absolutely need private vehicle transport, we just have to replace oil with CNG or electricity. Any range above 10km per re-charge would be useful

Ah, but expanded systems wouldn't involve several changes, would they?

Obviously a good road and private transport system is going to be preferred to a crap public transport system. We're talking here about investing in public transport so it's not crap anymore.

There is nothing inherent in the nature of trains, buses and trams which says they have to involve several changes and trundle along slowly and not have their timetables match each-other so that you have long lonely waits in obscure places for your connecting service. That's just crap management.

Think of all the public transport routes you know of. Now imagine they were the only roads we had. Driving a car would look pretty crap, yeah?

Again: obviously as it stands private cars are preferable to public transport for 90% of people. But it need not be so.

I agree that they should Kiashu.

I have never doubted that mass public transport could solve a lot of problems - I do have concerns about the cost and time frames. Many on this site are arguing that the shit will hit the fan long before a decade from now has expired, so if it is do-able (and I hope it is) then it might still be a pretty close shave.

But I will never be convinced that everyone or even most people can just move to withing walking or cycling distance of work. That's just not realistic IMO.

There aren't the dwellings in existence if people insist on a private bedroom. Some people may even have a vacant room in their house for storage or guests. There's a lot of slack in the system for people to economize and move into town. Migrant laborers will sleep many more than two to a bedroom.

So how many families would you have living in one house dwcal?

It's not for me to decide. I'm just saying if you don't find places to build high density housing, long distance commuting by car becomes unaffordable, and there are still jobs in town, people will get creative with the existing housing stock. That could mean anything from doubling up in houses and apartments to sleeping in their cars.

Ain't gonna happen dwcal. Only out of utter desperation, when economic integrity and social cohesion are beginning to break down.

Tell you what. You and a mate move in with a family of his or your relatives, then post again in 12 months and let me know how it's going.

No reason why people shouldn't keep their house in the suburbs.
Tough times mean that a lot of folk might be glad of a lodger, so you commute to work once a week not every day.
This happened quite a bit in previous times of high oil prices, it just didn't stick as they went down again.

I'll give you three guesses as to why it didn't stick. As I said, if it happens it will out of pure desperation.

Desperation is unlikely to be something that we are short of.....
No one said that life would be comfortable, but at least a sense of urgency should arrive at last.

Depressing stuff.

I noticed oil took a sudden plunge yesterday or the day before, then spiked back up and has now fallen again. Then a bout half an hour ago I read that Iran has test fired a batch of missiles and announced they can strike Israel and US forces in the region.

Can we expect the price to spike back up on this news?

I know stuff all about it, but people who do like Moe Gamble say that this is a technical correction, and expect the price to rise again, I believe.
What the 'war premium' is with the tensions with Iran is not clear - perhaps tensions with Russia should be added to that now.

And if you thought for more than a few seconds you would conclude that carpooling would also have it's limitations. Driving around to pick up passengers might reduce overall vehicle miles for many people only marginally or not at all.

that's just not true. if it were you wouldn't car pool with those people because it just wouldn't make sense.

People will just take the bus? Are you SERIOUSLY suggesting that existing public transport infrastructure can handle such an influx of people.

not everyone will take the bus and I didn't suggest that. it's not that tough to add buses. most local governments want you to take the bus.

there is also things like ride share/car share which reportedly take 12 cars off the road for each car the company puts on the road.

The oil price also is very much affected by the expansion of money supply. Most countries have very high money supply growth, even though it is off it's peak in some countries (such as the US)

Once money has been created, it has to go somewhere, and much of it is currently flowing into oil and other commodities.

Over the last decade or so, much of this debt expansion has been absorbed by financial instruments (often poorly collateralised), but now that financial edifice is collapsing, and whilst some money is being destroyed (in writedowns), more is flowing into tangible - and liquid - assets.

The recent oil price rise is contributed to by this late stage inflation effect.

"modern civiliazation was not built on cheap and abundant oil"

Actually, the data I have veiwed (though not going back before ww2 admittedly) suggests it was. For a very long period, oil averaged about $20 a barrel, inflation adjusted. This is only the third sharp spike since that time.

Are you saying that if oil had been expensive as often as it has been cheap we would still have developed such a huge thirst for it in the first place?

Cellulosic ethanol,gasoline,and diesel will be in commercial production by various companies by 2011. A company called LS9 has even developed a cellulosic crude oil that packs twice the punch of the fossil variety. These will be carbon negative processes. We'll see escalating oil prices for the next 5 years,then oil prices will drop as these businesses scale up. 10 years from now,fossil crude will sell at a discount to the cellulosic variety,because it's inferior in quality. It'll never cost more than $60 per barrel again...adjusted for inflation,of course.

Scale. Think Scale. Repeat after me: S-C-A-L-E. Scale.

Scale for biofuels (2.5 Mbpd):

Scale for cumulative demand addition (18 Mbpd for non-OECD, 7 Mbpd for OECD):

Scale for natural decline in oil production from existing sources (5-year cumulative for current 5% decline, 16 Mbpd):

Please put +2.5 - 18 -7 -16 together. What does it add up to?

Feel free to add any plusses into that equation you know of (synfuels, conservation, etc). It'll still be negative.

Are you beginning to grasp the severity of the challenge?

Theoretical oil on the paper or in the laboratory is not real oil in the market or in your tank, in the power generator in Pakistan or in the petrochemical factory processing line in Australia.

Wishful thinking does not power cars or turn into fertilizer products, I'm afraid.

BTW, the results from that biofuel addition will most likely not not be pretty:

Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report.

Pretty chart; but, who's to say it's accurate?

Stanford University tells us there's 1.0 Billion Acres of "Abandoned" land, lying fallow. That's "Abandoned" Land. As in "Not Being Used."

I posit that we can easily average 400 gallons/acre off of that land. Oh, and you know what the supposed "experts" continually overlook? There will be co-products from this process. Do you know what some of them are? Livestock feed for one. Yep, livestock feed from lands that were, previously, producing Nothing. Electricity production in some cases. Yep, we can use that, right? Fibers? Yep.

Income for a Billion poor subsistence farmers that will enable them to buy meat (that's fed with the co-products.)

It's not going to come down like you think, folks.

You are right that EIA and IEA have been wrong before (charts above from them).

However, we are talking 2011-2012. That's three years from now.

I don't claim any grandiose accurate knowledge about production in 2030. There are only forecasts which are more or less wrong.

However, if you have better data, please spit it out

As for land that is producing nothing, you are certainly mistaken. Once you remove all 'by-products' from the land, it both depletes (nutritionwise) and erodes (physically).

You have to supplant that with a huge I-NPK input, which in our current world means natural gas based industrial fertilizers, costing both money and energy.

There is no free lunch, not even in industrial agriculture.

This does not mean I don't see potential for biofuels to grow (otherwise I would not have posted these graphs), but I remain (based on best estimates available to me) both skeptical about it's scaling and horrified about it's environmental and food price impacts - based on current practices.

And current practices will dominate for the next 3-5 years
according to estimates.

That estimate is from USDA. I'm sure in your opinion they are wrong too and you have the magic numbers that are correct.

Do you have better data, studies, references from somewhere? I'd very much like to see them.

SamuM, thanks for the reply.

Perry made mention of 10 years out; and when you jumped on him about S-C-A-L-E I assumed you thought the 2012 chart was representing the future.

Now, having said that, you need to guard against over-generalizing as much as possible. Modern farming methods, seeds, crop rotating, etc. (plus, what we're sure to learn in the future) should pretty much assure us the ability to raise some energy crop (note: not, necessarily, the same energy crop every year) continuously.

An interesting sidenote to this is that Dedini (Brazil) has figured out how to make cane ethanol production "water positive." Maybe it'll work for sweet sorghum. Add that technology to "drip irrigation," and "micro-dosing" and sweet sorghum's ability to to grow on some pretty crappy soil, and you have an interesting scenario.

Oil palm is another feedstock than can grow without too much help. Switchgrass, and Jatropa/chinese tallow are others.

Don't forget the amendments such as ash, and biochar. With rough grains like corn, and sorghum you can get human food from the process just like animal food. And, some oil.

There's a lot more potential here than the API wants you to recognize.

Thank you for you reply.

I think the issue here is that we so easily put one another in either-or camps.

I'm not a "can't be done, ever" doomer.

And you or Perry are not "yeah, piece of cake, let's just do it" techno-fix believers.

So, my apologies if I frame either of you as such.

I remain very optimistic about many changes happening slowly in industrial agriculture and the potential for various cellulosic crops, but only as very small partial solutions. I read and follow these studies, tests and trials, including some of the bio-fix utopian sites weekly.

Where I remain skeptical is the real world implementation speed and scale many believe will happen overnight. So my reasons for stressing scale are twofold: all of the change we've had so far in systems of equal scale have historically happened over decades (think building liquid fuel infra/culture or green revolution in farming). Our current time frame visible most likely presents us with a unique challenge that may not necessarily speed or ease things, but may also cause additional chaos, confusion, political fighting and bad decisions that lose precious implementation time. So, big scale in a short time.

My second reason is that of careful selection esp. regarding time cost. I believe in trying out many of the things outlined in various TOD posts and even some of the things you refer to (although cellulosic ethanol scenarios are imho still mostly physically/logistically broken). I believe we have a better chance of succeeding, IF we don't pick the choices lightheartedly without best available data analysis and if we proceed swiftly. That's why I think pointing out the urgency, scale issues and risk of choosing wrong options are justified.

If I've come across as a single-issue basher, then believe me I'm not one and I'll keep on working on my communication skills so that I won't be mistake for one :)

PS AS for the "API" remark that was cheap as I've never ever used a single reference to anything from API propaganda :)

SamuM, I, also, just want solutions. Period. I think there is no doubt but what there's a considerable amount of light rail, Solar, Wind, etc. in my children's future.

In the meantime, however, I think a lot of people are "misunderestimating" the many positive mitigations possible from biofuels. A LOT of this, I believe, is a result of a Brilliant Misinformation Campaign by powerful vested interests. I think:

1) We have a little time, and

2) We can "scale" quite a bit faster than many believe. (I think back to the incredible things we accomplished during WWII in the way of building airplanes, ship, tanks, etc.)

I do Fear, however, that valuable progress might be lost due to panicked Politicos making bad choices. I, also, fear for any industry that's dependent upon the cooperation of those whose profits are enlarged by defeating it. Especially, if that industry is as powerful as the Oil Industry. The fact that the ethanol industry is detrimental, in the short run, to the profits of the Republicans' favorite donor group, the Food Processors, is also enough to keep one reaching for the Rolaids.

Anyway, I appreciate the discussion; and, I really do believe we'll all get out semi-alive with a little luck. Cheers.

Most alternatives, especially the biofuels types, consume more fossil the energy than they produce, and/or they yield electric energy that does not answer the liquid fuels problem.

I live in South Florida between the thousands of year old Coral Reefs and the Everglades.
I like to visit both these magnificent natural environments whenever I can.

There are still people here today who would like to develop more of the coast and the so called fallow swamps. Fortunately there are some here who have learned a thing or too and have come to understand that so called fallow or abandoned land can serve us better by remaining unproductive in modern agricultural terms.

Nature has this funny way of being productive all on its own without our attempts at civilizing it to suit our narrow unsustainable agenda. BTW I have spent time alone camped out in the everglades and have educated myself about the possibility of surviving there without modern conveniences. There were some interesting native cultures that thrived there in the past. I say leave some of that abandoned land alone for the future biodiversity which is just as important as raping the land for short term gain.

Absolutely... Man has to find a way out of all the mess we have created. Progress can only be said to be real when we can develop our society without damaging the environment or depleting finite resources. We have to go the Capitalist way, by increasing Natural Capital instead of going on resource-wasting spree. The future is not bright. If more oil is not found in time, we may not have enough resources to shift to Clean Energy. Human Beings are running out of time, and we have still not realized it...

"I posit that we can easily average 400 gallons/acre off of that land"

Not to encourage you , but , how did you come to that figure ? especially since you said "EASILY"

Also no link to Stanforn data ...

Farmer in California

Palm, sugar cane, corn, sorghum, switch grass, miscanthus, poplar, all have yields of greater (some, like palm, and cane, much greater) than 400.) Most of these (corn being the exceptiion) can be grown on pretty poor soil with a minimum of fertilizer. Sorghums can be grown on acidic, fairly dry soil.

I posted the Stanford Study on another thread a couple of days ago. I'll try to remember where I found it; but, I'll probably have to sleep first. :)

Stanford link

Nice that some of these places (often where the soil is ruined from the farming practices before) might grow switch grass, that still doesn't work. Also suggested is burning biomass for energy, not necessarily making biofuels.

It seems pretty certain to me the days of biofuelmania are numbered. Good riddance to false solutions.

LS9 - Oil-Crapping Bugs???

I don't believe it has the potential to work. When you just look at the numbers, you'll understand it is undoable. We must shift to Compressed Natural Gas quickly, and hopefully, that would buy us the time we need to innovate and scale up alternative energies, including the so-called "cellulosic crude oil "

Great research for this article and so appropriate
for the times.
Was watching the world markets at 4:15 PM here
state side on this Tuesday July 8th.
Noticed the carnage in the Asian markets all down
2% plus.
Oil price down from high of near $146.00 to $141.00
in a couple of days and yet the street still seems
overly concerned.
Could the traders in the pits and the brokers on the
floors of the worlds exchanges be getting the news?
S&P 500 is hemoraging at minus 15% YTD
EU markets look anemic.
Doesnt make sense when one considers that Asia is growing or Europe has a strong currency and is at
Dollars weakness is touted as a good thing for exports.
Could peak oil be making everyone a bit nervous?

This article could have been shorter.

1. What has caused the startling rise over the last 12 months?
Answer: Demand rising against static or falling supply.

2. Why has the price risen steadily for the past 6 years?
Answer: Demand rising against static or falling supply.

3. Why shouldn't we get back to the $20/barrel we enjoyed in the 1990's?
Answer: Demand rising against static or falling supply.

4. What caused the noticeable dip in price from mid 2006 to early 2007?
Briefly rising supply.

5. Why does the oil price seem to be going up at an accelerating rate since the dip in 2007?
Answer: Demand rising against static or falling supply.

6. Has the price stopped going up yet?
Answer: No.

7. What prices might we expect over the next 1, 3 or even 5 years to come?
Answer: Very f'ing expensive.

It's simple. We demand a lot, so we have to pay for it.

Right now on Insight on SBS there's a uni student who lives a great distance from her uni "on a property" (which is Aussie-speak for "on a farm") and works two jobs, so she's driving seven days a week, and spending $100-$120 weekly on petrol. She tells us that at uni they calculated their carbon footprint, and says that "I'd have to plant something like 500 trees a year just to make up for my driving."

For $100-$120 a week she could be sharing a flat in the city and walk to uni. But probably her parents cook her dinner and do her laundry and she doesn't fancy having to do that herself.

If we want to waste fuel, we have got to pay for it.

Hey Kiashu, you must type fast. I like your summarised version a lot - may I use it?
I just finished watching Insight myself. I thought Jenny Brockie managed the discussion very well. She is getting the pace of conversation right for these fast-moving shows. Ian Dunlop did a great job for ASPO, acting as the straight-talking wise man of the meeting. But that Uni student - words escape me. She has the fuel cost and carbon footprint facts in front of her. How much longer will it take for the cash register to go ka-ching and the obvious answer to pop up - stop driving so much!!!! The fishing trawler operator spending $50,000 a week on his 4 trawlers was sending a message too. Maybe some fish will get a better chance to breed.
Cheers, Mark

I didn't think it was overlong, albeit relied on the work of others a bit heavily, but made its case well. You might throw in this graph as well:

Electricity certainly can power a car but I think it will take quite a while to replace even 50% of the petroleum-burning fleet. Modern civilization has been built on the assumption of cheap, abundant and never-ending oil.

We tend to be short sighted in our use of oil and our history.

Constitutions on which our democratic governments formed and our civilization built were powered by muscle and ingenuity at the pace of a horse. Yes, we got fat and lazy as we changed the lifeblood of our economy to oil.

We can again change the lifeblood of our economy from oil to ingenuity. But we must be efficient because there are so many more people now than when our civilization was gifted to us.

Why do we need to move a ton to move a person? Even if everyone could afford the debt to buy a new electrical car, why would we hear such a resources drain on the Earth that we will hand our children? Would it be better to implement transport that provides the convenience of a car without the car?

Mobility is an aspect of liberty. The world has never been more liberated than in the age of cheap oil. We should keep the mobility and increase the efficiency we use energy from less than 4% in a car to better than 70%. It is entirely practical to do so.

Did some Sunday driving last weekend. I had 3 people in car to visit the in laws. At $1.60 AUD /litre there was no noticeable drop in traffic jams around Sydney on a sunny sunday afternoon. The carpark at work is overflowing. Only 3 or 4 car pools out of 100 cars. Agree about the value of petrol"pushing a one tonne car 10 kilometres on 1 litre'. We'll need the psychological hit of at least $2/litre to start really getting through. By buying a very efficient 1.5 litre ICE car ( 5.6l/100k), I'm actually spending less on fuel than 2 years ago for same kilometres. As Matt Simmons once said- " conservation gets the initial easy return on effort".
After that it just gets harder and harder.
Spot thermal coal at Newcastle hit $200/tonne briefly last week. I guess we'll all pay the real price for energy/electricity very soon as Asia demands more and more for their billions of aspirational citizens.

The analysis by Goldman Sachs in the next chart below suggests that price rises to date have already destroyed demand amounting to about 5 million barrels/day

No, they have reduced demand by 5mmbpd, as the chart says. If you count all such demand suppression as "demand destruction", then the market would be in a permanent state of demand destruction, as the quantity consumed would always be a bit higher at lower prices, until the price reaches zero. The difference is somewhat important when you're trying to predict what the market will do. Someone deciding because of the high price not to take a road trip on the holiday weekend is not destroyed demand, as that demand is still there, it will come right back when the price goes down again. Someone deciding to ditch the SUV in favour of a more efficient means of transportation, that's destruction of demand.

Personally I suspect that GS underestimates the amount by which demand has been suppressed by the high price. After all, if oil had remained at $20/bbl, the inflation-adjusted price would've fallen a fair way. If inflation hadn't manifested in oil prices, it likely would've done somewhere else. If you look at what has typically happened to consumption in countries where the price has been held down by government subsidy, it's considerably more demand growth than you'd expect from that chart, though that's not exactly representative of the world. To get their estimate of price-adjusted demand growth to match price action of the past six years, GS assume very inelastic world demand, with a 100% rise in price meaning only a 1.5% reduction in demand. I prefer to think that demand growth was greater than they assume; perhaps a deviation from whatever model led them to the number they picked, somehow caused by the changing nature of world economic growth, as exemplified by the familiar story of auto sales in China. This has some importance for forecasting, as demand growth then has a lot further to fall before prices stabilise.

Very, very good expose of the situation!

So many issues are dealt with in structured manner.

I've tried to a fourth round of analysis myself, so this post of yours happens at a very convenient time.

Some things that one might consider adding, although they are more complicated to the lay reader:

Speculation vs. Manipulation

There is a difference between speculation and manipulation. Most non-commercial actors in futures markets are speculators. They speculate in regards to where oil price might be headed by buying futures contracts and options on futures. This allows them to hedge against oil price risks in their operations. This is normal market activity; there is nothing shady about it. Further, futures market prices, however speculated, do not directly affect spot-prices. Spot price is what determines the price of oil in actual physical market or the premium over the long contract oil prices (effectively the same thing).

In theory markets can also have financial manipulation, which refers to the attempt at deceiving the market by artificially manipulating physical oil markets (i.e. physical availability or actual spot-price). This means that they would somehow control spot-prices of oil in way that does not reflect the fundamental supply & demand situation. However, this manipulation would only be possible, IF futures prices were able to dictate spot prices (we'll get to that later), or alternatively if the manipulators bought the physical oil off the market and hoarded it in oil inventories. Hoarding has not happened. This much is fact. It has been covered here and elsewhere many times. Discussion about that should be laid to rest, unless somebody has new factual data that actually differs from that already shown (ref: IEA/EIA stock/inventory data). We need data, not mere accusations.

Now, how about the manipulation of spot-prices through futures trading? Some have claimed it is possible, without really explaining how or without providing causal data that backs up this argument. The best that has been given is some correlating data that might or might not explain price manipulation, if there was an actual mechanism of causation. However, no mechanism has been proven and instead, many accusers have resorted to insinuations, factual errors and an argumentative fallacy of ‘guilty by association’.

Let us now assume that it was possible to affect spot-prices through futures prices. There’s no proof of this that I can find, in fact there is proof of otherwise. However, for the sake of the argument, let’s assume it was possible.

Unfortunately for this manipulation argument, the data does NOT support it!

Futures options are roughly balanced for long/short positions, thus they are not signalling the markets in any one direction:

NYMEX WTI Oil futures market has been evenly balanced for net long and short positions

Source: CTFC, Jeffrey Harris, 5/2008

Further, non-commercial actors (banks, funds, etc) have been halved their long positions in the past year, while oil price prices have doubled. Now, if non-commercial speculators - who have been accused of squeezing ICE futures markets (London), could actually control the price through long positions, then the oil price should have come down in the past year. But instead, it has gone up:

Non-Commercial speculators have bet less on price rise, when oil price has gone up

Source: CTFC/Reuters/Norges Bank, 6/2008

So, futures trades at ICEF cannot explain the rise in oil prices.

Unregulated overseas markets are the cause
Additional accusations have been laid against ICE Futures (London). These are unfounded.

ICE Futures (London) has been accused of being a 'dark and regulated exchange". This is plain wrong. ICE Futures is independent party cleared market governed by Financial Services Authority (UK) and operates under a legal framework of Financial Services Act 2000 by UK law. So far, their regulatory track record is better than that of US counterparts of late (Enron, WorldCom, Arthur Andersen, Global Crossing) so that should put an end to all the silly 'dark and unregulated' accusations which are little more than fear-mongering.

Another argument has been that does not restrict the size of trader’s positions like NYMEX on oil futures. This lack of restriction appears to be correct. However, ICE Futures trade only 15-20% of WTI futures and options, rest flowing through NYMEX. There is no futures price differential between the two (ICE vs NYMEX). If there were - it would be a guaranteed arbitrage of silly proportions. Markets neutralize such imbalances rapidly.

Price manipulation & price speculation summary
There is no data that I can find that currently oil futures prices would be able dictate oil spot-prices, or that such effect – if it existed – is now raising the spot price of oil. In fact, data suggests that non-commercial futures speculative positions changes would lower the price.

Financial Fundamentals (not speculation) affecting the price of oil
What is the effect of financial fundamentals other than speculation? Real economists have also weighed in on the matter:

Norge's Bank analysis of the situation and actual market data concludes (6/2008):

“To date, there is little empirical evidence that pure speculation has driven oil prices higher than the underlying fundamental and financial factors would suggest.” - Norge's Bank

What are these underlying financial factors? Well, Look at the correlation between crude oil prices and USD trade exchange value:

When USD value drops, oil producers raise the USD nominated prices

Source: Thomson/Norge’s Bank, 6/2008

Value of USD and price of oil almost perfectly inversely correlated for the past year

Source: TDE/IEC, 5/2008

Bank of England wrote in their analysis (6/2008):

“Speculation seems to have played a normal role along the futures curve. It remains quite difficult to explain the large rise in the oil price as due to the presence of speculators.” - Bank of England

Further, this is what several other economists had to say on the issue:

“The mismatch between unabated global desired savings and lower realized investment, between the amounts available for finance and the flow of hard assets to absorb it, has led to a liquidity glut which has pushed long term real interest rates the world over lower. This has spilled over into markets for existing real and financial assets - real estate, high-risk credit, private equity, art, commodities, etc - pushing prices higher.” - Raguram Rajan, 2006

Another noted economist Jeff Frankel has cited low interest rates as one of the most important factors for increase in commodity prices. The Central Banks have been blamed for the recent rise in commodity prices as they kept the monetary policy too loose for a long period of time. Guillermo Calvo, another renowned economist echoed similar thoughts.

In plain English: when the reserve currency of the world (USD) goes down in value, oil goes up (not necessarily in that order). Of course, we all knew that already. More importantly, correlation is of course not causation. Regardless, if somebody wants to look for guilty parties for the rise in the price of oil (in nominal USD) based on correlation alone, then they should be looking at the Bush Jr government and particularly the Federal Reserve plus some of the other loose-money-policy central banks. If there has been financial reason for the price of oil in the past year, then it's coming from these sources.

An astute observer might add that the very reason US congress is holding hearings about oil price manipulation is for the very reason that they want to divert attention away from themselves. However, I think Hanlon’s razor applies here as well: “never attribute to malice that which can be adequately explained by stupidity.” Regardless of the reason, this is - as Euan has stated - a failure of leadership by G8 politicians and to some extent financial institutions.

Perhaps there are still some issues left unwrapped which I’m sure will continue to be debated:

  • Several oil industry seniors claim the fundamentals in oil industry have not changed since oil was $65/barrel. In their opinion, the price rise is either due to financial fundamentals (USD value) or to financial manipulation.
  • CTFC is undertaking a detailed study on the issue of market manipulation. If they find manipulation, then the levers that allow for this will likely be removed swiftly. So far, they’ve found none.
  • Bank of England has, imho, correctly pointed out that in a hypothetical situation of a manipulative bubble, OPEC has very little incentive to keep growing their own inventories due to increasing inventory costs in the face of bubble bursting. When the bubble finally bursts, the producer inventories can be so low that that the increase in demand hits another supply wall, rapidly bouncing up the price of oil again.
  • Further BoE suggests that the old oil market fundamentals may not hold true anymore. We may have moved beyond the earlier assumed OPEC price band and that new fundamentals may be setting in.
  • Now that both oil price demand elasticity and oil price income elasticity have gone down in the world according to economists, it is likely that the rise in prices will affect spending habits much slower than assumed earlier. Sure, demand response and even destruction will happen, but will it magically save us by quickly cutting demand so much that the prices crash? Nobody can know for sure, but the data on this does not offer immediate cause for relief.

Please note that these completely acknowledge the fact that futures prices normally alone can do very little to affect spot prices of physical delivery. Further, they do not explain, how futures prices could currently affect spot-prices. Even more, their arguments are contradicted by data given above.

In the end, all parties seem to agree that the supply-demand situation has tightened considerably in the past 10 years and that it continues to be tight in the near-term. This includes almost all the so-called cornucopian optimists.

So, even if speculation was effecting the physical oil market, the majority of price rise is more likely to stem from the fundamental supply/demand issues.

And again, just like Anawhata stated, this does not exclude the likelihood of a significant price drop in crude oil prices in some future time. In fact, this type of see-saw price curve is exactly what some Peak oil analysts have predicted already years ago. If the see-saw manifests itself, prepare for more of it in the future.

Is there any way we could finally resolve this question of manipulation/speculation?

The data we all would like to have is:

  • Full disclosure of resources and reserves being developed (ala Matt Simmons)
  • Future flow rate of each crude variety (API/sulphur) offered to the market
  • Future flow rate of each crude variety demanded by the market
  • Better understanding of oil price demand elasticities and their effects on various regions
  • Existing refinery capacity + capacity under construction as time series into the future broken down by input crude variety and distillate output capacities
  • Forecast for flow rates of each crude variety, based on known megaprojects and the little spare capacity we have left currently (this we know roughly vias aggregates of light/heavy/unconventional, but data is not publicly available broken down into smaller API/sulphur categories)
  • All transactions in all physical and financial oil markets would be completely transparent and traceable

This data would show how the mismatch between supply and demand in various crude oils has developed and is likely to develop. It would also lay bare all speculative and manipulative levers in the market, if they existed. Further, through elasticity data, we could at least better guess what would likely happen to various economies due to oil price rises.

The supply data we can estimate, which is in fact what the good people at ASPO have been doing these many years. And the results are not encouraging, if one looks at the possibility of where the oil price and supply security is heading in the future.

However, as it remains likely that before we get any more accurate numbers even resembling those listed above, 2010 or even 2015 will have come and gone. We all know what that likely means:

“By 2010, the production of the fuel that has driven the world’s economy will start to rapidly decline. This will conflict with the steadily increasing demand for oil. The collision of these two trends will lead to shortages and increased prices, providing a strong incentive to shift to alternative fuel resources…Due to unequal distribution through the world of oil and gas supply and consumption, [the upcoming] transition will result in significant shifts in global power and wealth.” – Ray Leonard, VP of Kuwait Energy in a private meeting in June 2008, as reported by ASPO-USA

So, brace yourself. This is only the beginning of a big ride.

Disclaimer: I’m not an economist, not a futures trader, not a financial analyst. Anything written above is my honest opinion, based on studying the matter for roughly one hundred hours give or take a few. I don’t have any financial position in any energy markets or related derivatives markets. I stand neither to lose nor to gain financially on the oil price movements, other than it affects my direct spending as a consumer. I’ve been wrong before, I will be wrong in the future. If/when reality proves otherwise, I will duly acknowledge it. I believe the future is unknowable. I expect exactly the same from those who argument against the above, nothing less.

Hey! Write your own article!

Seriously, SamuM, that was fantastic. Into the bookmarks with it.

Seems like P.O. is going main MSM.
Am watching CNBC as I post this 7:45 AM July 8th
and the guest speaker is T Boone Pickens who is making
the case for solar, wind , NG and green or renewables.
He's using words like "Manhattan" scale projects and
He's using stats and numbers I have only seen posted
on this site.
His choice of words and sentiments expressed are
verbatim to what I have only been able to find on this
site alone.
Must be extreemly satisfying to be able to say....
"I knew it all along"
The community of people here are truely the spearhead
of knowledge for whats going to be the most challenging frontier for humankind since upright
If I possessed the authority I would take this think
tank and place it in a position of power to implement
the ideas that are brainstormed here on a daily
Lacking such, I will endeavor to learn from and utilise to my enrichment the wisdom freely offered
here from people the world over.
The serendipity for having found and gratitude for using this site cannot be expressed by me.
I feel fortunate to have been brought up to speed by
this site in a period of just a month lurking and
a couple weeks posting.
The hosts and participants here are performing a
service that cant be quantified.
You have earned something I value highly and dole
out only rarely......my respect.
sincerely: Mr Nephilim Exile

Boone announced the pickens plan. I joined and promised to spread the word Worth a try however I would prefer that there were no subsidies to possibly mess with the EROI.

Matthew Simmons is talking about $600 per barrel oil, and he knows his stuff.

According to Mr. Simmons, global oil production is now declining, from 85 million barrels per day to 60 million barrels per day by 2015. At the same time demand will increase 14%. This is like a 45% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted.

And I say that we are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from "outside," and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.

Kind of makes you wonder if it's not time to get out of Dodge to a sustainable place.

The one missing piece of the puzzle is the rate of demand destruction in general in the industrialized world, but particularly in China. Tripling of the shipping rates may kill China’s export capabilities and recession/ depression in the U.S & Europe could lead to a huge reduction. I just don’t see how China can artificially prop up their economy and continue fuel subsidies beyond say 2009. India? I wouldn’t give them even that long. The question is would this give us another two years? Or will China continue its exports in coal steamers, junks & 19th century style clipper ships?

Global GDP = $48 trillion
Global Energy Consumption = 475 million trillion joules
Global Energy Density of GDP = 475 million trillion joules/$48 trillion
= 10 million joules/$1

Energy in one liter petrol = 9000 Calories
= 9000 Calories x 4200 joules/Calorie
= 37.8 million joules

Energy in one barrel petrol = 37.8 million joules/liter x 159 liters
= 6010 million joules

GDP made per barrel petrol = 6010 million joules/10 million joules/$1
= $601

Counter Check:

World petrol consumption = 31 billion barrels

GDP made by petrol = 31 billion x 601
= $18.631 trillion

Share of petrol in GDP = $18.631 trillion/$48 trillion
= 40%

Share of petrol in energy = 31 billion barrels x 159 x 37.8 million joules / 475 million trillion joules

= 40%


(1) Oil account for 40% of world energy consumption therefore 40% of world GDP

(2) Given the total energy consumption of world economy and amount of oil produced it is found that each barrel of oil results in $601 of world gdp


(1) World crude oil price will never exceed $601 of today's dollars.

(2) There need to be an ROI of 2, therefore world crude price will never exceed $ 300 per barrel.

(3) Since crude oil is of no use and must be refined first and there need be some profit for refineries to work, assuming a 25% profit margin for them ($140 crude oil / 42 X 1.2 = $4.1/gallon-gasoline), we get the upper limit on crude oil price to be $300 x 0.8 = $240/barrel

This is till we use significant amount of petrol in world economy. Crude oil price may be ten thousand dollars per barrel if its use in little amount only by extreme rich and kings and presidents in extremely small amounts compare to today (hundreds or few thousand barrels per day).

Love this analysis. It makes very good sense as a static analysis. May be (slightly?) affected by (first, second order) derivatives as time goes on.

I would love to see further debate on this (it clearly contradicts what matt simmons is saying for example).

Am a bit puzzled though because it means that I will never pay more that 1.5 times the current price for petrol (gas). (As a European consumer much of the current price is tax anyway so a doubling of oil price only adds 10-20% to petrol prices).

Can you point me to anywhere where this debate has been expanded WisdomfromPakistan?.

Ok I have done a bit of work on the derivatives.

WisdomfromPakistan - your calculations depend on the ratio of oil consumed to GDP.

If the widely accepted ballpark figure of a 3% PA increase in GDP per unit of oil consumed is taken as a given then the $240 max can rise at a rate of 3% a year. This assumes fixed dollars of course. Dollar falls cause the max to rise proportionately.

Another question:

"(1) Oil account for 40% of world energy consumption therefore 40% of world GDP"

Is this based on the assumption that oil is regarded as an input to GDP production? What if a proportion of oil is actually regarded as a good (I.e. an output?)

There is no going back to $20/barrel short of a world recession that shuts down demand for oil, and for everything else.

To get back to $20/barrel we need about 5 million barrels a day of spare capacity. Presently the high price of oil is causing economic damage to a number of economies. A rapid method to find spare capacity is to conserve. A 25% cut in the US oil consumption would provide the needed spare capacity to avoid economic damage from high oil prices while we begin a rapid transition to an economy that does not use oil.

So long as we do not encourage expensive to produce oil being brought into production, there is no reason prices have to be high during the transition. More at: http://mdsolar.blogspot.com/2008/06/oil-is-too-expensive.html


Chris, with all due respect, how do you reason this?

Spare capacity alone does not dictate prices.

History has shown both in OPEC and in the US, that if the selling price is much below the productions costs, much of the capacity will be left in the ground until prices rise.

Currently just the upstream costs of conventional oil dictate a much higher market price for oil than $20 per barrel. Most industry estimates I have seen state a minimum from $60 to $80 USD.

Where did you get $20/barrel figure?

If you get this from the EIA AEO 2008 presentation about spare capacity vs price of crude graph, then I'm sorry, but you are nor reading it correctly. Those figures are historical averages and do not account for the fact that cost of developing oil fields has more than doubled in the past few years.

I cannot see, although I'd like to be wrong, how we could ever get to $20/barrel, unless we replace 60-90% of the oil consumption with something else and which would leave on the market mainly the remaining cheap crude production from ME that still might have combined F+D+A costs below $20 or so.

Other than that, I fully agree on potential benefits of conservation, in regards to very high oil prices and many other factors (economy, wealth transfer, CO2 emissions, etc).

I think that your estimate of cutting consumption by 60 or 90% to get to $20/barrel is pretty high since that was the price not so long ago. We have not yet made the very foolish move of replacing cheap oil with expensive oil though the current price signals very much encourage such stupidity. I think you are confusing the cost of oil if we increase supply further with the present cost of producing oil which still includes a very substantial fraction at $10/barrel.

If we cut US consumption by 25%, many new ventures will fail, and that is just what we want. The price will come down by a lot. Getting cooperation with other countries in cutting consumption could allow us 15 years of $20/barrel oil to get off of oil completely.



your opinions are not backed up by data. I don't argue for arguments sake, I argue, because I'm interested in the thruth.

Nominal oil price was in $20 range between 1990-2000. Since 2000, the costs of finding, acquiring and developing (upstream) oil have gone up by more than 110% (I've already give you data on this). Downstream costs have increased over 80% in the same period (ref: CERA Refined Product Demand Supply and Economics Trends, 6/2008). The cheapest production prices is KSA and even their bottom level is now at $40, for other OPEC countries it goes up to $55+ (ref: International oil economy, MOL Energy Group, 3/2008). Lehman's data puts the price bottom at c. $65 (ref: Oil and the Dollar - At Whose Price, Lehman Brothers, 6/2008).

I still have no idea where and based on what data you pulled that $20/barrel level from, but based on all the data available to me, it is not based on reality.

So, to reiterate, we are already using and developing more of that 'expensive oil'. That's the whole point of peaking of sweet light crude.

Please prove me wrong with a reference to study. Again, I'd be happy to be wrong about this, because then the potential for a price drop would indeed be very high.

Please do not also forget that the last time oil price fell rapidly in the 80's, ME OPEC producers fell in to a debt spiral and swore off to never let it happen again. One could easily say the same about Russia and Venezuela now (and rest of the developing oil exporters). They will defend a price band bottom vigorously, so crashing the oil price by cutting demand might be much more difficult than people imagine. It would only result in higher production cuts. Oil producers are not stupid and they must cover their costs.

They will not pump you oil for $20/barrel to buy, if it costs them $60/barrel to develop and deliver.

If I recall, KSA has been investing in expanded production which raises their costs. If we can dissuade them from doing this, their costs will drop back down to their former level. Refusing to buy all the oil they are capable of producing will end further investment in new capacity.

Again, you are including development costs but we really only want to consider sunk costs, and even then, we don't have a responsibility to see that these are recovered. Some may choose to sell at a loss rather than lose even more with no sales at all.


"If I recall, KSA has been investing in expanded production which raises their costs."


"If we can dissuade them from doing this, their costs will drop back down to their former level."

IF, but yes :)

Again, you are including development costs but we really only want to consider sunk costs

You want to to consider depreciated costs.

As oil is they lifeline, they probably want to include investments for future development.

So IF2, yes (grinding my teeth) :)

we don't have a responsibility to see that these are recovered


Some may choose to sell at a loss rather than lose even more with no sales at all

IF3, but yes (trying really hard to imagine this now) :)

However, my point is that in the real world, we can't cut 60% of our oil consumption, we can't extort KSA, but in fact they can extort us, although I doubt they want to try that.

However, on price elasticity the data appears to be very low, which doesn't leave a lot of room for price extortion by demand cuts:

Source: Bank of England, 6/2008

So yes, also in my book, after three really big IFS, we might be able to do it. In theory.

But I don't believe we can in the real world nor that we will even try. Of course, I'm not particularly happy about it, but I accept it as the most likely outcome of this reality we live in.

Then it's time to move to other plans that have higher likelihood of being carried out and succeeding.

I guess I would still maintain that we only have to cut consumption 25% initially rather than 60% just because 5 million barrels a day spare capacity seems to go with $20/barrel oil.

In terms of succeeding in implementing the rationing, this really only requires an executive order. The president should also appoint an adminstrator of the Economic Regulatory Administration as required by law. The plan could be commenced within a few months.


I've asked this before. How would you get US oil users (primarily drivers) to sustain a 25% reduction in consumption if oil was back to £20 a barrel, gas was $1 a gallon and the jolly old let's-borrow-ourselves-to-death consumer credit economy was once again going gangbusters?

The method to sustain the 25% consumption drop is obvious: have the Federal gov't tax the hell out of it like you guys suffer...maybe even a little worse.

Of course, there ould be a blizzard in hell the day any of our politicians would throw themselves on that sword. Look at all the fuss we caused with you guys just a couple of hundred years ago over a tax on tea. And we still have all our guns.


Well, we have a standby gasoline rationing plan to deal with supply problems. If we are rationing, demand is controled by a method other than price. For those for whom price is no barrier, there is a white market included in the plan where they can pay for the unused rations of others. However, this is still within the limit of the rationing.



I can follow your logic but let me throw in a few points for your consideration. Back in 1986 oil dropped to around $10/bbl (depending on grade). The global depression caused by the late 70's oil price spike reduced global consumption to the point where there was about 10 million bbl of excess capacity. This would seem to support your predictions. But it wasn’t just the existence of the excess capacity that drove prices down. As global consumption declined OPEC proved its impotence as a cartel. Members dumped as much oil as cheap as possible into the market. To prevent oil prices from dropping Saudi began cutting back their production. Eventually Saudi would have to shut in their entire production stream. Hence they opened the valves and began reclaiming market share. And oil prices crashed to a level that absolutely no one had predicted as possible just a few years earlier. MARKET SHARE ACQUISITION is what drives the supply/demand model. Though it’s a factor in the process, excess production capacity itself does not drive prices down. Had OPEC acted as a true cartel and all members had cut production proportionally, higher oil prices would have persisted regardless of the amount of excess capacity.

Now let’s jump to today. We are seeing the beginning of demand destruction. I won’t predict that it will reach the level we saw back in the 80’s but it might. But regardless of the level of decreased consumption some factors are very different now then they were 20 years ago. When the world asks Saudi to produce an extra million bbls of oil it isn’t really asking that. Saudi cannot produce an extra million bbls of oil because there is no buyer for it. The world is buying exactly what it wants and can afford. What is actually being asked is that Saudi offer that million bbls of oil for less then the other exporters require. In other words, the world is asking them to take market share away from the other exporters. It would be this COMPETITION FACTOR that would put downward pressure on prices. But now let’s look at the different circumstances right now. Almost all oil exporters openly admit they are at PO. Saudi may or may not be…only time will be. Consider Mexico as a specific example. It is even being reported by the Mex. gov’t that their production is falling like a rock with virtually no near term way to prevent it. And if you didn’t know, their oil exports have provided as much as 60% of their federal budget. Ignoring the logistics question of transport, assume Saudi goes after Mex. market share of exports to the US. Mex may not be willing to compete on a price basis with Saudi. They would certainly lose critical income right now but they would also preserve price support for their remaining exports as well as saving production they’ll need even more desperately down the road. Though Saudi may be producing an additional million bbl oil/day, they would only be replacing the crude Mex pulled off the market. In this scenario Saudi would only need to drop prices marginally at first and then easily raise them back up in time.

A very simple comparison is what happening to the market for high mpg vehicles right now. It doesn’t matter how big an inventory the car makers may have right now. As long as they are content with their market share they have no reason to lower prices. But remember the big difference here: the car markers aren’t looking at a diminishing capacity to supply product to the market place. But most of the oil exporters are in that predicament.

As I said earlier implied I think predicting future economic conditions with any sense of authority is somewhat foolish. Based on history I can see severe demand destruction driving OPEC members dropping prices significantly to preserve as much cash flow as possible. And I can just as readily see OPEC members voluntarily restriction their production to maintain price support and preserve their assets which will be back in demand soon enough. If I were Mexico I don’t think I would have any other viable choice.

Remember: I’m offering valid economic models…not predictions. But watch for comments to my posts and you have all the solid predictions you can swallow.

In what I am suggesting, there is no component of excess capacity that comes from increased ability to produce. Everything is in reducing demand. We don't want any new capacity because all new capacity is expensive. That makes that oil essentially worthless as a fundemental economic engine going forward. So, to avoid the stupidity of developing expensive oil, we cut consumption dramatically, to zero in fact. The rate at which we cut consumption is governed by the rate at which already developed cheap oil can be produced. This is a declining rate, so we need to use less oil each year. But, we can assure that we only use cheap oil if demand is kept below that rate of production. It is worth remembering that consumers will refuse to buy oil that is expensive to produce if they know that there is a glut of cheap oil. They can bide their time to get the best deal. All we need is for there to be a glut. It is hard to see countries that can still make money on their oil production at $20/barrel attempting to support prices just to let some silly deep water arrangement get all the money that is available. With a plan to cut oil consumption to zero, they won't have a future to save oil for unless it is for domestic use.



I'm having a little trouble following your logic regarding restricting demand to levels below supply in order to keep oil prices low (if I understand you correctly). How could this restriction be acomplished?

Also a small put pertinent point: oil has never been priced based on it's cost to develope it. Nor will it ever be. Thunderhorse Fld in the Gulf of Mexico will come online this year...maybe as high as 250,000 bopd. I promise you that when BP commited to the project almost 10 years ago they didn't anticipate current pricing. But if half the world blew up tomorrow and oil dropped to $30/bbl they would still produce the field as planned. It doesn't matter to the world whether BP spent $2 million or $2 billion to develop the field: the market forces will determine the price. I've been a petroleum geologist for over 30 years and have never seen an operator cut back production because of low prices. Usually the pressure is just the opposite. The capital spent is often refereed to as "sunk cost". Wells are shutin only when the cost to lift the oil exceeds it value.

What low prices will do is kill any very expensive projects in the development stage. I've seen as many projects killed because of pricing risks as I have seen killed for geologic risks.

You can only restrict US demand to a level where oil prices have to be low for a certain period. If the US goes it alone, we can probably keep prices down for about 6 years. With help from other large developed consumers we can probably keep it down for fifteen. The idea is to ration oil to the level where world demand is well below production capacity. A spare capacity of 5 million barrels per day seems to go with $20/barrel oil. We can produce that spare capacity within a few months by simply invoking our standby gasoline rationing plan. To keep the price low, we need to make further cuts in our consumption to counter both production decline and demand growth elsewhere. We happen to know approximately what both these figures are. If we cut off new investment, supply will decline by about 4% a year. If we keep oil at $20/barrel, demand elsewhere will increase at about 3% a year. So, we, with our 25% share of consumption can affect things for perhaps 6 years. After that, we won't be using oil and so we won't have any leverage on the demand side. We need 15 to convert our transportation fleet and zero years to convert our use of oil for heat. So, it would be good to have some cooperation with, say NAFTA and NATO to help in cutting demand. But, we can make a portion of our transition off of oil using $20/barrel oil just acting unilaterally. If we can get our consumption within domestic production, we can impose price controls again to finish off our transition, so that cooperation may not be all that necessary.

The aim would be to kill any projects that are expensive so that we don't waste any further resources on seeking expensive oil.


There is a general misconception that Electric Cars can replace ICE Engines any time soon. Nope, not so fast. It ain't gonna happen, unless this is a declared Public policy around the world.

First, we need to shift the vehicles to an intermediate fuel, which is available in plenty, and can push the Tainter Economic collapse another 20 years, until we can really get things done, and come up with a solution...

And that intermediate fuel would be... Compressed Natural Gas

We have plenty of gas, to last for atleast 2 decades before it peaks. We can start now, and retrofit vehicles to run on CNG.

Compressed Natural Gas Vehicles - Our Saviour

The case of bio fuels:

The best bio fuel we have is ethanol from sugar cane. Its best because of following reasons:

(1) When counting for all energy inputs its still net energy positive, that is, produce more energy than it consumes.

(2) The technology is well known since pre historic times.

(3) We have a good, reliable, large scale example of brazil.

(4) It produce both ethanol and electricity. Ethanol can be used to power existing field of cars after mixing some amount of gasoline in it (how much amount depend on type of engine but 15% max is a safe bet). The electricity not only provide for all energy usage of processing machines but also produce extra energy that can be sold to grid.

From each ton of sugarcane we can get:

(1) Either 112 kg sugar or 72 kg ethanol but not both. What we actually get is 138 kg sucrose. It can be refined to get 112 kg sugar having 4000 Calories/kg or 72 kg ethanol having 6000 kg Calories/liter. One liter petrol has 9000 Calories/liter. Therefore 1.5 liter ethanol equal 1 liter petrol. Therefore from each ton of sugarcane we can get equivalent of 48 liter petrol.

(2) By burning bagass we get 288 MJ primary energy out of which 180 MJ is used in the ethanol making process. The rest 108 MJ at turbine efficiency of 33% results in 10 Kwhr electricity.

One ton of sugarcane needs 175 cubic meter water.

10 inches rain means 1028 cubic meter water per acre.
1 acre-ft canal/river water means 1028 cubic meter per acre after acccounting for loss of water in evaporation and run-off on its way from canal/river to farm.

All of the water poured in farm is supposed to be used by sugarcane because sugarcane remains in ground for 3 years unlike crops like wheat, rice etc that are harvested within 6 months.

At a 10 inches rain-only farm we can get 1028/175 = 5.87 tons sugarcane = 282 liter petrol = 423 liter ethanol and 58.74 kwhr net electricity.

At an average 20 inches rain-only or 10 inch rain or 1 acre-ft canal/river water or 2 acre-ft canal/river water we get 2048 cubic meter water per acre per year.

This can be extended to 4 times by pumping water from ground using tube wells. Note that we can't use more than 4 times water than is replaced annually by rain and/or canal/river water assuming a 20% rate of evaporation, run-off of the water poured on farm, otherwise we damage water column in ground and thus is unsustainable.

So we can get on an average land 8224 cubic meter water per year, resulting in 47 tons sugarcane, that is, 3384 liter ethanol, that is equal to 2256 liter petrol AND 450 kwhr electricity. That means 14.19 barrel oil. We have to use one quarter of this to power tube wells to pump ground water needed to grow that much sugarcane. So we get a net 10.64 barrel oil and 450 kwhr electricity.

For a world appetite of 31 billion barrels per year we have to use about 3 billion acres of fertile land to crop sugarcane.

World land area is 37.5 billion acres. Arable land is 15 billion acres. Land used by humans to grow human food is 6 billion acres. Rest 9 billion acres are rainforests and other homes of wild life and bio diversity.

I follow the reasoning behind the drop in consumption due to recession. I don't follow the reasoning that shows a strong recovery.

Does anyone have any solid evidence or data that there is not at least some attempt on the part of one or more of the large OPEC producers to manipulate oil prices and squeeze the US economy in an effort to influence policy or politics?

Oil was around $50/barrel in Jan 2007. That's about the time the surge began in earnest in Iraq. Certainly Iran does not want us there. The Saudis may want us out of there as well...I have read an article or two that said that Iraq may have the potential to crank out as much as 9MB/day. Both of these countries may have an eye on Iraqi oil themselves.

How do we know that the output numbers or net export numbers provided by these countries are accurate? Could they, for example, create dummy companies to bid for their own oil on the spot market, and "sell" it back the next day, and lie about their output? Maybe it seems simplistic, but it occurs to me that this would result in a decrease in supply that would support the spot market increases.

I also do not see why there may not be collusion between big investment banks and foreign oil producers in this regard. It is well known that some gulf countries had/have large investments in US financial institutions. I recall seeing some articles concerning the infusion of cash from some oil sheik(s) when the subprime crisis started to unfold. Could they be trying to get their money back?

And here is my last one, fodder for more conspiracy theory. it is also known that investment banks, especially Goldman-Sachs, the leader in oil commodities trading, have overwhelmingly supported (with campaign contributions) one particular presidential candidate...one who announced candidacy in January 2007. this candidate would seem to be most likely to benefit from the poor economic conditions created by the run up, and has also pledged to bail on Iraq asap...or at least did during the primaries.

Is there any reason these factors may have as much or more to do with the run up in oil prices than anything else? I have seen plenty of charts and tables and read a lot of words on the internet, from here and all over, and none can explain, fully, the three fold increase in the price of a barrel of oil since January 2007.

Mr K,

Probably the most important factor in your theory is that there's no need for Saudi to do the dummy corp. Despite reports that you hear regarding how much oil they are selling at any one time there is no documentation. Since the kindom took over Aramco in 1982 the Saudi have refused to document their oil sales. At one point any Saudi citizen providing this data would be subject to a death sentence for treason. They may say they're selling 9.5 million bopd right now but it could be a lot more or a lot less. Their crude buyers are also restricted from documenting their purchases. This is why you hear about tanker tracking: it's an effort to document export claims.

Saudi is free to increase or decrease their exports as they wish for whatever reason they choose. And can do so in full public view. The Saudis admit they have excess production capability they could push on the market right now. All they need do is drop their price and take market share away from another exporter. They have been saying they will not do so on an almost daily basis. They repeated say oil is priced as it should be and they are not going to reduce their prices...period. No conspiracy...just hard-nosed business.

Who knows what political deals are going on. But as far as Saudi wanting us out of Iraq I wouldn't be too sure. The Iraq government is now run by the type of Muslems who hate the Saudi type Muslems. Iran is also controlled by the same Iraq type Muslems. With the US out of the picture in Iraq we would likely shift our forces to Saudi for their sake as well as ours.


yes, I am aware that SA is run by sunnis and Iran by shi. But if Iraq succeeds as a stable, free democracy, it is bad for all the despotic neighbor regimes, especially SA. Also, I have read some accounts that Iraq's reserves, if fully exploited, may render as much as 11 mbd. This could act as a counterweight to the Saudi domination...as I wrote, I have read dozens of articles, looked over countless pretty graphs, charts, and figures, and nothing seems to fully explain the greater than parabolic run up in price over the last couple of years. I have not read any that suggest we may be getting reamed out again, like we did during the embargo of the 70's.

I think both Iran and SA, though they are in essence enemies, both want us out of there, and they want to see Iraq fail as a state.

Mr K,

I agree with you. A good dose of true democracy in that part of the world can't but help. But I wish I were more optimistic about it coming about in any meaningfull way. I don't mean it disrespectfully, but those tribal instincts are very powerful.

I've seen the samer reports on oil reserves but they need to get the drill bits in the ground for it to mean anything. Glad to see the Kurds forcing the issue.

With respect to the price run up: do you see the Saudi control of excess procution capacity (and their unwillingness to use it to take market share away from other exporters) as a real factor?


I think the Saudis can strongly influence the price of oil but I don't think they would declare their intentions like they did in the 70's.

On that note, I also think that part of the Iraq war was actually aimed at the Saudis. Of course, Bush could not state that openly. SA is the heartland of a bigoted, vicious form of Islam. Most of the 9-11 hijackers came from there. They also have enormous wealth from their oil, which has been used in large part to fund bin Laden and company. A free, friendly Iraq has the potential to break the Saudi grip on the oil market, and at the same time, have a free and hopefully thriving country right beside them as a shining example of how much better life is when not lived under the iron grip of pure sharia.

I think they want us out of there.

Mr. K,

You may be right about the "they" that want us out. Which reminds me of a factor I haven't seen reported in a couple of years. Who eactly is the current "they" in the KSA and who will the future "they" be. I don't recall the datails but the story dealt with the changing power structure in the royal house and who would eventually control (or share control) of the country.

You have any recent insights?

i have a recollection of this too. Bin Laden has wide support in SA. Maybe royals who support his idealogy are pulling the strings now.

"Convergence of the two curves shown above indicates serious supply tightness over the last 2 years which explains much of the recent price surge, with perhaps $5 – 10 per barrel in volatility added by an influx of investment funds seeking a safe haven from the falling US$."

Where do you get these numbers from? Why not, say, a $50/barrel 'falling USD' premium?

Numerous commodities have spiked during the past year, not just oil; just as investors have fled debt-based investments, since the credit crunch began. Where has that money gone, if not into commodities?

There is a compromise between the speculation theory and the fundamentals theory possible, namely, that the piling of money into commodities has accelerated the recognition of fundamentals. Fundamentals themselves have not changed enough during the past 12 months to explain the latest doubling. Or at least, I want to see a quantitative quasi-economic argument, e.g. one that presents a model for the price elasticity of oil supply and demand, before I believe that the incremental changes in fundamentals during the latest doubling could be responsible for most of that movement in prices.

Great article Big Gav! I love concise articles that provide an overview and extrapolate future possible outcomes. They give one food for thought.

Speaking of which, how about a 3rd pattern - pattern C. In which the price of oil price doesn't rise ever higher, but rather vacilates between two price points. The lower being the price oil is in high demand, and the higher which causes demand destruction via a contracting economy. In this pattern, the price stays within a range of say 120 to 250 in July 08 dollars.

I suggest this pattern as a possibility, because although the price of oil has only gone up in recent years, it seems likely there will be a price point that so strongly contracts the world economy that it is not exceeded. 250 in July 08 dollars is simply a guess. It could be more or less, but I don't think we'll see 400 or 1,000 dollars for a barrel of oil.

This pattern suggests that as oil consumption lowers along with declining oil production, in a post peak oil environment, along with a contracting world economy, the price of oil will simply move between two price extremes.

This is exactly what I see happening. 240 seems like a good upper bound from the figures I see above.

Welcome to TOD. Fire up your flamethrower. That's all that seems to be going on today...

Yup. It's called the TOD meat grinder. Once you come out of it at the other end, you're all the better for it and want to have a second go! :D

I've seen worse. There was a board I participated on years ago that threw flamefests to a section called the "shark tank".