Prepping for a Repeat of 2006/2007?
Posted by Robert Rapier on October 21, 2008 - 8:52pm
At this year's ASPO conference, I was twice asked about the gasoline supply situation - once at a panel session and once by a reporter. At the time, there were gas shortages throughout the Southeast, and some of the speakers gave the impression that this was the beginning of the end: Gas shortages are here to stay, and we are on the verge of the entire country running out of gasoline. There were a number of predictions along the lines of "It's going to get a lot worse before it gets better."
While first discussing the source of the gas shortages - low inventories followed by a hurricane that sidelined a significant source of refining capacity - I answered the question as follows: "This is a temporary event. We will see imports start to pick up and fill the shortfall. We will see refining capacity start to come back online, and I predict that a month from now gasoline inventories will be higher than they are today."
Of course that doesn't mean that we won't find ourselves right back in this position, nor that it won't be worse next time. But I think failure to understand how the refinery/pipeline/import system works - sometimes by people in positions of authority - can cause premature predictions of imminent disaster. I think we have far too many people who can't identify a wolf telling the villagers that the wolf is here. Many know that this is a pet peeve of mine.
So what has happened since ASPO? The ASPO conference took place 4 weeks ago. At the time, gasoline inventories stood at 178.7 million barrels. Imports at that time were at 1.2 million barrels a day. Since then, we have seen 3 consecutive weeks of inventory build, and inventories now stand at 193.8 million barrels, just 2 million barrels short of their position of a year ago. Why have inventories built? Three reasons. Imports, as I predicted, picked up and have been above the 1.2 million barrel level in each of the past 3 weeks. Demand remains historically low due to high prices. And refinery utilization has increased in each of the past 3 weeks.
However, there was one thing I didn't predict, and that is the primary topic of this essay. If someone had asked me, I would have guessed that because of the inventory situation, gasoline prices would remain strong. That hasn't happened. (I think the anti-gouging laws worked to keep prices in check, at the expense of worsening the shortages. See Rationing by Running Out).
As inventories have recovered, gasoline prices have plummented. Retail gasoline prices have fallen each of the past 3 weeks, and are now down by $0.50 since the conference. This is of course being driven by the collapse of oil prices, but doesn't bode well for spring gasoline prices. Why? It seems that we have been here before.
In August of 2006, retail gasoline prices briefly touched $3.00/gal. Prices then plummented by more than $0.70/gal, and spent the late fall/early winter in the $2.20/gal range. The sudden arrival of lower prices had two primary impacts. First, imports dried up, as it wasn't nearly as financially attractive for exporters to send gasoline to the U.S. Second, demand picked up sharply, eventually reaching winter levels of 9.5 million barrels/day - unprecedented for that time of year. As one might expect, this resulted in a steep decline in gasoline inventories, and we went into the spring of 2007 with historically low inventories.
I devoted a lot of time in the first half of 2007 toward discussing the plunging inventory situation - and predicted much higher gasoline prices as a result. In mid-April, I even got into a debate with Doug MacIntyre, who at that time was the author of This Week in Petroleum, about the direction of gasoline prices. He felt like prices were peaking in April of 2007, I thought they still had room to run. In fact gasoline prices ran up another $0.33/gal in the six weeks following our discussion, setting a national retail gasoline price record at that time of $3.26/gal.
So now we return to the fall of 2008. Because of record gasoline prices, demand this year has been much lower than last year. At times this year, gasoline demand has been half a million barrels a day lower than at this time last year (or in 2006). But gasoline prices - currently still much higher than in 2006 or 2007 - are on a downward trajectory that is certain to result in an increase in demand. In fact, demand last week reversed course and trended higher for the first time since late August. If prices continue to fall, keep a close eye on demand, imports, and ultimately inventories.
This is all setting up to be similar to the situation we saw of much lower prices in late 2006, which led to record gasoline prices by the summer of 2007. There are a couple of potentially significant differences this time around, though: Demand destruction as a result of people buying more fuel efficient cars won't quickly be undone. And the credit crisis should also slow demand.
This all highlights the fact that we are playing with fire with our gasoline inventories. It was no surprise to inventory watchers that parts of the country quickly ran out of gasoline following Hurricane Ike. This is the risk we run when we maintain gasoline inventories at a low level: Events that disrupt gasoline supplies can very quickly cause havoc. The solution to the problem isn't easy. Refiners have seen margins evaporate, and thus don't want to maintain high inventories. A strategic gasoline reserve would seem to be an answer, but it would be difficult to maintain because of the seasonal variations in gasoline blends. The shelf life just wouldn't be long enough.
So while I expect this trend of shortages to continue, you can give yourself an advantage by being educated about the inventory situation - especially in your particular part of the country. That won't prevent entire cities from running short of gasoline in the event of a disruption, but it can prevent you personally from being one of the masses of people waiting in gasoline lines, wondering exactly what went wrong.
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Thanks Robert.
I would argue a 4th reason. Wall St firms have delevered and many actually discontinued their oil trading operations. Fewer players on long side requires means higher inventories as they sell what they owned originally for long term investment, in order to raise cash. It then goes on the inventory pile. This process is ongoing and will continue into December as hedge funds get redemptions and close down - but the 'forced' liquidations, IMO, are mostly over.
Tragedy of theoildrum.com reading commons....?
;-)
The recent shortages were no problem for my wife and I. We live close enough for me to walk to work (which I do, 1.7 miles each way), and it is only about a 2.5 mile trip for my wife in her reasonably fuel efficient 1990 Honda Civic. We live in a small town with shopping and other essential services all nearby. Unless we need to make a trip out of town (which only happens a few times per year), we only need to use 1 or 2 gallons per week at most.
We are not just "lucky" - we have been trying our whole lives to situate ourselves this way, because I've known for decades that these days were coming.
When Ike was on its way, I made sure that both cars were filled up, and I also made sure that I had a spare gas can filled as an emergency reserve. We could still be coping today with what we had on hand, even if the gas stations were still all out of fuel. This is in contrast with almost everyone else in the area, many of whom were really starting to hurt just a week into the crisis. If worse came to worse, we even had a contingency plan for my wife to ride a local shuttle bus service to work, and we have enough food stockpiled from gardening and bulk buying that we could have gone several weeks without grocery shopping if need be. In short, we were prepared.
Supplies and prices will go up and down. We all know what the long run trend is going to be, though. People need to be making a serious effort NOW to adapt their lifestyles so that they will be less vulnerable on supply disruptions in the future.
After being out of gasoline here in Western North Carolina from Ike until about the 2nd week of October, we now have gasoline priced at $2.88/gallon regular. (I omit comments the stupidity of pricing this low.) We are evidently getting a price break before the election as prices in this end of the state are usually higher than those below the Appalachian Escarpment. However, in the past week, some stations have been running out of mid-grade and premium. For those readers in WNC, keep a close eye on supply. For those readers in other parts of the country, be aware that plastic bagging of the premium pumps may be your first warning of local shortages.
I don't have a car, and so don't worry so much about spot shortages in my area. But for everyone else who does drive, could you (or someone else) give pointers on what you mean by "being educated about the inventory situation - especially in your particular part of the country"? Where would we go about getting information like that?
One other thing that would be incredibly helpful, if anyone knows where to find it, would be numbers on heating oil inventory, broken down by region. I assume heating oil comes from the same refineries and thus is subject to the same kind of disruptions as gasoline. People don't need fill-ups nearly as often, of course, but "rationing by running out" would be even more catastrophic, especially in the northern states...
Sylviah,
This will get you started for sure. http://tonto.eia.doe.gov/oog/info/twip/twip.asp
It is updated every Wednesday (Wednesday is the day when national inventories are announced - about 9:30 AM Eastern - the link is updated later than that tho, maybe 12 noon Eastern?). There are tabs along the top, with a link for gasoline and a link for distilletes. You can look at current inventories in 5 geographical regions and look at past inventories for years and years. It also has price information, refinery inputs and outputs, imports, etc.
Have fun!
North American Fuel Shortage Reports is regularly updated, too. Site running very slowly at the moment though.
Robert, I think that most of the recent decline in consumption of gasoline has been due to the recession, especially the crash in the home building industry. Some of the decline in consumption has been a longer term reaction to higher prices, but gas is now $2.39 a gallon where I live--which is pretty low in comparison to the average price over the past two years.
In other words, what I am saying is that the total demand for gasoline has gone down (DD curve shifted down and to the left) rather than merely having the quantity demanded go down due to an increase in price.
Housing construction really nose dived this summer if you read the stats its basically dead. This is a huge industry that vaporized in the US.
Although we like to think that demand destruction is a individual thing people use less.
Unless they alter there lifestyles permanently its probably better to think of it as demand suppression. As long as you own a car there is a chance you will drive it more as your circumstance change including simple things like the weather. Demand destruction would be sending a car to the dump and getting a more fuel efficient car. Trading in a car with lower gas mileage probably does not result in any decrease in demand esp as the economy sours as people decide its more cost effective to buy the cheaper used car and defer purchase of a new vehicle. So overall fuel efficiency would be the rate at which used cars with poor gas mileage where scrapped vs the fuel efficiency of the new cars.
In a slowing economy the rate that cars are replaced and end up as scrap declines.
You can look at Cuba as and extreme example they don't replace their cars with the latest fuel efficient ones despite gasoline being in tight supply.
And of course you get into issues where if one person conserves lowering the price then someone else will defer their own conservation efforts.
http://www.environmentalleader.com/2008/10/16/suv-pickup-sales-increase-...
At the end of the day the simple concept of individual demand destruction has holes in it you can literally drive and SUV through. In fact the whole concept does not have a lot of scientific backing. People assume that decreases in VMT mean people drove less because of some reason but plenty of scientific papers exist that have repeatedly debunked this myth.
Here is one excellent report.
http://www.ewgateway.org/pdffiles/library/trans/trafficvolumes/vmtrpt.pdf
Now my thesis is that real demand destruction is caused by job loss not by any of the other factors that are traditionally associated with decrease in gasoline demand.
The other is of course long term increases in overall fuel efficiency but this change in fleet efficiency is slow to occur.
This leaves for this summer the collapse of the housing industry as the primary culprit for any demand decline and its especially important since it employed a large number of illegal aliens esp from Mexico. Remittances are down substantially and we have evidence that a fair number of immigrants have returned to Mexico as work prospects dimmed in the US. Having a fair number of people simply leave will do wonders for your overall fuel usage.
You can look at the housing industry collapse the demographics of its work force etc in detail but its obvious that it will impact total VMT esp once you also include the pyramid of industries directly and indirectly related to housing and commercial construction that also declined.
Its a big change and we had the housing bubble of the century how big ?
Well lacking a detailed study its pretty safe to assume this industrial collapse accounted for most of our demand destruction.
And even more interesting when you take a deeper look into how VMT is calculated its not and exact science with about a 5% error term. I've looked into how its done and you could easily have inflated VMT estimates when new subdivisions are added from the construction traffic. Generally this is not a huge issue since the subdivisions are eventually filled and the traffic pattern inflation is justified.
A couple of VMT links.
http://daily.sightline.org/daily_score/archive/2008/04/21/the-future-ain...
http://www.tfhrc.gov/pubrds/07mar/05.htm
http://www.nap.edu/openbook.php?record_id=6358&page=15
https://www.nysdot.gov/divisions/policy-and-strategy/darb/dai-unit/ttss/...
http://www.uctc.net/scripts/countdown.pl?231.pdf
http://www.epa.gov/EPA-AIR/1995/August/Day-23/pr-944.html
http://www.gmupolicy.net/its/pdfweb/VMT%20Estimation.pdf
http://cat.inist.fr/?aModele=afficheN&cpsidt=2645573
Politically VMT is an important number since VMT in one of the important criteria for determining where and when roads will be expanded.
Congestion alone and its effect on real gasoline usage and the impact of construction traffic is in itself a large subject.
Why do I keep bring this up ?
Well if I'm right about how demand destruction works and the MSM is wrong then demand destruction is highly correlated with job loss and even more closely correlated with the housing industry and its workers demographics.
Once the housing industry is gone which it basically is we cannot expect a lot more contraction in demand except via extensive job loss in other industries.
Also as you look beyond the housing bubble it becomes difficult to find another industry that can collapse rapidly and result in drops in demand. I'm not saying it won't happen but generally it seems that going forward overall unemployment is a better gauge of demand. Demand will probably now decline because of general employment factors
housing stands as a fairly unique industry in this respect.
Bottom line is the chances of further changes in demand happening fast enough to result in low energy prices are doubtful. The economy would have to collapse faster than oil depletes. This may happen but then oil prices would fall dramatically which would tend to stimulate the overall economy. And by dramatic I mean back down to 10 dollars a barrel. If supply really exceeded demand because of economic collapse then oil prices will dive.
Right now and what we have seen to date is no indication that the supply of 70 dollar oil exceeds demand. If real supply was limited then the price of oil would be falling far faster then it is now. Demand for 70 dollar a barrel oil is healthy and demand for 60 would probably even be higher.
Given the unique nature of the housing industry the tango between oil demand and economic collapse will probably result in higher oil prices and this summer should probably considered a one shot reprieve that probably won't be repeated.
As we head into this winter when the housing industry traditionally slows in most of the US we will get a better picture of the real reasons for VMT declines and the associated demand drop. I expect changes in VMT to drop well into the noise level and it will remain flat to slowly declining and well correlated with unemployment regardless of the price of gasoline.
"Demand destruction" is not a term used by economists because it is inherently ambiguous.
Time after time I've seen confusion on TOD when using this term. Sometimes it is used to mean a decrease in quantity demanded as prices rise, other things staying the same. Sometimes it is used to denote a shift in the whole demand curve--due to recession. Sometimes it is used to mean both.
I suggest that we discard the use of the term "demand destruction" and instead use economic terms as economists have defined them. Whatever else you might say about economists, we do have a well defined terminology. Anything of value in economics can be expressed either in words or tables of numbers or graphs or equations; these are just different ways to present information. We should not be any sloppier in our use of words than we are with numbers.
I agree 100%
Obviously I agree that the demand curve shifted as the housing industry destructed this is demand that will not return in the foreseeable future.
For all kinds of reasons this is very much a one off event. Surprisingly is one of the few large industries that we really don't have to have.
Other forms of demand may have declined with high prices but its sensible that low prices will spur demand that was simply suppressed because of price alone.
Demand destruction i.e a downward shift in the demand curve for individuals is difficult to prove as long as those individuals have jobs. Its safe to say that a steady increase in unemployment numbers represents a aggregate shift of the demand curve downwards that insensitive to the price of oil. Just like my demand for a new Ferraris remains zero even if they slashed the price by 50% or a crappy house in CA for that matter. Increasing rates of unemployment is one of the few ways that demand for gasoline absolutely drops regardless of price.
Short of dropping quickly into and all out full blown depression its difficult to come up with another major shift in the demand curve as what occurred with the demise of the housing industry.
As and example the other big bubble of the past decades is agricultural land prices as this bubble is probably popping with a vengeance right now. Does it lead to a shift in the demand curve for oil ? Well probably eventually since land is used as collateral for loans to plant at some point crops grown will decline and the demand for oil from agricultural will decline but a big driver in this would be if oil prices continued to increase increasing planting costs faster then agricultural land prices collapsed. So probably its a combination of both that would cause this industry to use less oil but its highly doubtful it will result in low oil prices.
You can do the same for the airline industry or practically any industry you pick and its doubtful that low oil prices are the outcome.
The one case that stands out that stand out remains a fast depressionary collapse and I'd argue that high oil prices are better than this solution at first glance.
Given the willingness of the Central Banks to intervene in the economy and the fact that the populace has no problem taking on tremendous debt that will never be repaid I'd argue that instead of a fast collapse primarily from the financial industry collapsing we instead will see oil prices rebound and go ever higher and the feds keep attempting to pump the economy only slowing the collapse rate and building a ever larger mountain of debt. High oil prices will pay a key role in grinding down the economy and indirectly lead to ever higher unemployment making ever greater economic intervention required.
This is the slow route but slow is relative a fast financial collapse if it was to occur is probably less than a year away will a slow collapse with high oil prices allow the economy to collapse over a period of 4-5 years with the debt load eventually leading to a financial collapse not seen in modern times.
Since peak oil is not recognized by the mainstream everyone seems to have chosen option 2 under the believe that we can successfully inflate our way out of this somehow.
Probably overall a fast financial collapse now is probably the best long term solution since it leaves most of the system intact and the resource base in place to do something different. And GW, peak oil, overpopulation fiat currencies etc all the ills of today's societies arguable could be reviewed and we could probably even do something about it. The second road of continually pushing the economy only to have oil collapse it leaves us with less in my opinion.
"Given the willingness of the Central Banks to intervene in the economy and the fact that the populace has no problem taking on tremendous debt..."
Populace may be willing but does populace have the money to loan? Or will we be depending on rest of world to loan us the money? Will they keep that up at current rate? Remember we've a war or two or three to fight and we plan to cut taxes. (At least so the candidates say.)
In the US, the Government has essentially agreed to buy bad debts. At present, the debt holders seem to be investing in short-term treasuries, i.e., lending the money back to the Government, because of the general attitude of fear in the credit markets. Thus rates on short-term treasuries are extremely low. It will be interesting to see what happens to these rates when they want to take the money out and lend it to someone else. Then we'll find who has money that they are willing to loan to the feds.
I agree that job losses must have been a major contributing factor to demand reduction. But I wouldn't discount foreclosures. This forces families to relocate. They often would have to move from a remote suburb to some apartment that typically would be closer to work. I would expect that foreclosures would reduce the average commuting distance.
My bet on the next industry to generate massive job losses is the automotive industry. There is a downward spiral involving fewer VMT, lack of credit and car sales. Recent news suggest that Detroit is already traveling this path.
The problem with statements like this is every time it may be true it could also be false
thus its a statistical thing. On average I'd have to think that distance is not and overriding factor. In the US most families have both spouses working and generally their jobs may not be nearby so close for one may be farther for another. The point is we really don't know and the chances are its a wash to many other factors influence where people live.
My bet on the next industry to generate massive job losses is the automotive industry. There is a downward spiral involving fewer VMT, lack of credit and car sales. Recent news suggest that Detroit is already traveling this path.
I thought so also but when I looked I found that VMT for the rust belt states has been flat for years. Even Detroit has chanced little despite the long economic slowdown.
I'm not finding the links off hand its getting late here.
But for example here is one.
http://www.brookings.edu/reports/2008/~/media/Files/rc/reports/2008/06_m...
No huge changes between growing and stagnant cities.
The link I gave for St. Louis above has similar stats to Detroit.
Here is one for the rust belt states.
http://www.michigantrafficcrashfacts.org/doc/2005/10yr_15.pdf
On page one you can see that VMT for all these states has increased slowly despite the deteriorating economic conditions.
VMT does not grow much if at all but whats important is it also does not suffer a steep decline despite the slowing economy.
Another good site on VMT.
http://www.portlandonline.com/TRANSPORTATION/index.cfm?&a=90249&c=39561
Bottom line is that even severe economic decline seems to result in slow growth to flat VMT !
This is important since its what a lot of people believe will result in moderate fuel prices.
Historically when we enter a recession VMT flattens and is highly correlated with the housing industry decline. Since we had a monster bubble and unprecedented decline in housing its small wonder that we have seen not just the traditional flattening but a decline.
Thats it the party is over all historical data even for regions that by any standard have depression level economies indicate that VMT will effectively remain flat. This means that once oil supplies have depleted to balance remaining demand we probably will see gasoline prices increase.
We probably have not hit the point yet where gasoline prices will act as a significant curb on demand. Economic factors alone will not shift the demand curve down to create a excess.
Everything I have found indicates we will be going into a Recession and then Depression with ever spiraling gasoline prices.
And finally a lot of people are expecting that OPEC I question this assumption.
Given that depletion marches on and the we are ever closer or past world peak I suspect this time around small cuts will be capable of putting a floor under prices. Given all the economic/VMT data I've looked at.
For peak oil it looks like the crash of the housing industry is a Indian summer as another poster on this thread put it. Its a short respite before we get back on the high energy cost economic stagnation treadmill.
I hope you enjoyed a fall drive.
Thanks for the reply.
Was it you that first posted this graph? It is the history of US VMT since 1983.
There has been some periods of relatively high unemployment and/or high foreclosure rates since 1983. I think of the recessions following the stock market crashes of 1987 and 2001 for example. But there is nowhere a plateau similar to the one we have in the 2005-2007 period. There is nowhere a decline similar to the one we have in 2008. So the correlation between VMT and either unemployment of foreclosure rates do not appear to be an overriding factor. At the very least it is not confirmed by a plain eyeballing of the graph.
I am under the impression we both have to think again.
It was the mother of all housing bubbles far beyond anything we ever experienced in the past. By any metric this housing bubble was far larger than any preceding ones. Also its the peak of not just the recent bubble but the overall housing bubble since WWII.
Its the big one.
In other cases not sure why you don't see correlation VMT flattens or slows inline with previous recessions even 2001. There is a very clear plateau.
If you read my post here I jumped threads sorry.
http://www.theoildrum.com/node/4672#comment-425025
This is I believe the correct relationship between energy demand and the economy.
The key economic part is the number of transactions and how many are for new stuff that uses a lot of energy or in our particular case oil.
The Eused = Ntrans*Eembed
is quite similar to food.
Foodeaten = Number of people * calories desired (required)
The reason I point this out is people generally have a hard time reducing the number of total transactions either because of a growing population or that they feel the transactions are required. Going to the store to buy less food uses almost the same energy as going to the store to buy more. Going to KMart to buy one toy is almost the same as going to KMart to buy two toys. Most of the embedded energy in the form of oil lies in the trips themselves not the products purchased. You buy more coffee and drink it at home instead of at starbucks on the way to work the embedded oil is not all that different. The starbucks closes but the people go work at the grocery store because of higher demand stocking coffee.
The point is you have to look at transactions*energy cost of goods bought. You can readily save a lot of money and still surprisingly not change the overall energy equation by that much.
The embedded energy in new housing construction is HUGE and thus its not surprising that the end of the housing bubble of all time results in a drop in VMT.
The difference in the price elasticity of demand and the income elasticity of demand. The smaller plateaus during the last couple downturns are indicative of the income elasticity of demand, since oil prices were relatively stable, while the recent downturn has been indicative of the price elasticity of demand up until recently.
I am with you up to the consequences of the equation
Eused = Ntrans*Eembed
Beyond that I must disagree.
Let's take a look at a few graphs from shadowstat.com. Whats is good with this site is they correlate the official statistics with an adjusted version that takes into account changes of methodologies that occurred over time.
Let's look at the GDP here
Source: http://www.shadowstats.com/alternate_data
I can relate the small 1991 plateau in the VMT graph with the recession. Likewise for 1995. But looking at the 2001 recession, I just don't see any plateau until 2003. And the magnitude of what happens starting in 2005 doesn't even compare any of the above VMT events.
You argue this is the housing collapse. Well this doesn't chime with this graph:
Source: http://economistsview.typepad.com/economistsview/2007/10/subprime-forecl...
In this graph, the foreclosure rate was at a low in 2005 when the plateau started. In 2007 the foreclosure rate was just returning to the level observed in 2001. The timeline just doesn't match. The VMT plateau was started well before the housing collapse had even begun.
Another graph from shadowstats.com is unemployment:
Again I would be hard pressed to see a correlation between unemployment level and the plateaus in the VMT graph. The 2007 to 2007 period doesn't have especially high unemployment. And I don't see a VMT plateau comparable to 2005-2007 in the periods of high unemployment.
I agree that correlating transactions with energy used to perform the transaction is a good idea. I don't believe we have identified which transactions are being avoided or optimized to justify such an impact on VMT. The candidates being brought forward by both you and me don't correlate with the VMT data.
"another industry that can collapse rapidly and result in drops in demand".....
How about Chrysler, GM and Ford: 200,000 employees and thousands more working for suppliers. If the price of oil goes up soon (as some people, including you are saying) and if it goes up a lot, these companies are history. Their former employees won't be driving so much and neither will their thousands of family members or the millions of auto worker pensioners left out in the cold.
And how about the government (some state govts) if things get bad, they will have to freeze all activity. No driving then, right. That's another "industry" that could collapse, one by one, of course, not all at the same time.
And WalMart....KMart, Target...all the big box retail stores are quite vulnerable as many things they sell aren't really necessary. People can make do without buying new stuff and a lot of it is junk.
There are a lot of vulnerable industries that could collapse at any time IMO!!!!
Terrific post, as usual, from Mr. Rapier.
I keep asking myself -- and others -- "Isn't this essentially about bigger issues and other issues than the technical stuff?"
Granted, the technical matters related to gasoline supply specifics in the USA are important, if only to help dispel the fog of ignorance about such technicalities.
When we do not understand how we get our gasoline and how this very peculiar market works, then we are more prone to isogete -- to read our own assumptions into whatever is happening.
The future, which is very hard to predict, is mostly a canvass upon which to cast the shadows of our own beliefs. This goes for scientists, technocrats, religious mystics, businessfolks of all kinds, and laborers.
But the technicalities of the marketplace are always ultimately related to our understandings of that which our business people, politicians, religious leaders, and even corporate technicians hope to avoid: Reality. Witness the wisdom of the Free Market lately.
My guess regarding the future is that we will continue to ignore the complexities of the oil business and of its relationships to social justice issues in the USA and around the world, and especially to environmental degradation. We will exert every effort to expand the power of the very large corporation-government or "Fascist" organizations that make the rules for "we the people" and break those rules at every turn.
Unless a fundamental, creative, evolutionary awakening occurs, we are expending most of our energy to kill people on purpose or to kill ourselves by environmental accident.
Oddly enough, I find myself refreshed by the candid discussion of gasoline inventories and the limited but succinct discussion of gasoline in the so-called "Free Market/Bail Out/Socialism For The Rich/Upward Wealth Distribution" economic system of the USA that has been largely globalized.
I hope for transformational leadership at this time -- I think RR and others at TOD contribute to this greatly.
I pedal and drive an electric vehicle. Both modes of transportation require me to be acutely conscious of the energy I expend in getting around from day-to-day. Today I carried about 800 pounds of tools for about 9 miles to do work for two families in their homes. I track each mile and hope for a day when we will be able to be aware of our energy expenditures and inventories in a creative, collective fashion.
Our consumption of gasoline -- and energy --needs to become a matter of ecological awareness rather than of the vicissitudes of the so-called free market.
I'm not sure how that can happen, but it surely must happen if we are to have any chance at transforming the ecological Bottleneck6th Great Die Off into an opportunity for our species to evolve into a wiser species than we are now.
Thanks, RR, if you've read this far. Any "Big Picture" ideas from yourself, who is so well-acquainted with many aspects of the petroleum industry in the USA? How do we translate your awareness into policies and practices that make the world a better place?
Any "Big Picture" ideas from yourself, who is so well-acquainted with many aspects of the petroleum industry in the USA? How do we translate your awareness into policies and practices that make the world a better place?
http://www.theoildrum.com/node/3915
The most important one from my perspective is not to allow gasoline demand to climb back up. I have long advocated a fossil fuel tax, but in today's economic climate that discussions becomes ever more difficult.
Sarah Palin has contributed one useful piece to this puzzle. (I probably don't have to say it, but I am not a fan). One effect of her nomination (besides proving that McCain has scary judgment) was draw more attention to the oil dividend that residents of Alaska receive. Imagine that we raise fossil fuel taxes, but earmark that for a dividend for residents of the U.S. If people don't conserve, then the dividend might offset their increased costs. But most people are going to respond to price, in which case their usage would go down, and they could end up with a little more cash in their pockets.
That's an idea that came to me one day while the Alaskan dividend was being discussed. I don't know if that's the best way, but we have to come up with a way to increase prices - and it has been demonstrated that people respond to price - without putting people at a great financial disadvantage. This is of course not THE long term solution, but it will stretch supplies buy us time.
This sounds like the cap and dividend plan proposed by Peter Barnes: http://www.capanddividend.org/. It does have advantages over cap and trade or a carbon tax, but a fixed dividend per capita sounds so socialist, how would Americans ever go for that? Now that you mention Alaska, if they can give a fixed dividend to everybody, no excuse to stop the rest of American doing the same for carbon auction proceeds.
I saw gasoline for $2.56, today. Diesel was $0.88 more at $3.44.
It looks like, to produce enough diesel they have to "overproduce" gasoline. Diesel demand seems to be less "elastic." They used to be, more or less, in equilibrium. I wonder what changed?
ethanol using diesel, not replacing it?
that's part of it,
I thought we were exporting diesel,
well at least to Canada right now?
Does ethanol use a Lot of Diesel?
Farm equipment, and transport by semi (can't be piped easily).
I mean, I know that to produce a pound of ethanol the farmer is required to use .01 lbs of diesel. And to transport a pound of ethanol 1,500 miles by train requires .015 lbs of diesel. You think that's it?
Diesel for moving around the fertilizer and its components around the world.
Fuel oil in this case also because of shipping. Along with pesticides etc.
We move a fair amount around the world. Some diesel for irrigation in some cases.
http://www.greenbaypressgazette.com/apps/pbcs.dll/article?AID=/20080729/...
Part of the increase in fertilizer costs has to be attributed to transportation.
Has Diesel demand dropped much in Europe?
Diesel demand seems to be less "elastic."
The diesel supply situation permanently changed when ultra low sulfur diesel specs were introduced. I have addressed that at length here:
http://i-r-squared.blogspot.com/2007/05/comments-on-senate-hearing-on-ga...
Regarding why the price of diesel is so high relative to gasoline, look at my article from July Why isn't the price of gasoline even higher?
You are one the right track about "overproducing gasoline" in order to get enough diesel. Much of the rest of the world uses diesel for their vehicles, because it has more BTUs per gallon, can be made to operate more efficiently, and at one time was priced cheaply compared to its true value, since the US considered it a residual product. Now gasoline is a residual product for the rest of the world, so they are willing to sell it to us cheaply. On top of that, we are adding corn ethanol to the supply, to further increase the supply.
I think the wild card here is the extent of the economic downturn at a global level. Will the entire world economy experience negative growth? Or will the enormous sums that central banks are pumping into banking systems set us up for a fast rebound and inflation next year?
I expect the economic rebound to be slow because once the economy gets significant momentum rising oil demand will hit up against non-rising supplies and perhaps even declining supplies.
The next time oil does a big rally above $100 per barrel it is not going to come back down again below $100 for many years. This is analogous to an Indian summer.
I wonder if the economy simply can't afford oil over $100. Any rally in oil could simply increase the intensity of the recession, consequently bringing the price of oil back down again.
Perhaps I misunderstand, but Memmel seems to suggest apart from housing there isn't much room for demand destruction. Personally I currently hold a different view.
Consider the resource industry. There has been a widespread decrease in commodity prices, copper, wheat, gold, oil, orange juice, soybeans many are half the price of the 52week high. Base metals are especially low zinc, nickel, aluminium, lead. This won't just result in people losing their jobs. Instead entire mines will be put out of production. Farms could shutdown, crops rotting in the fields as the properties enter foreclosure. This could dramatically reduce energy (and fertilizer) demand.
But this sector is actually pretty essential compared to say consumer discretionary. Malls could shutdown for instance, lights out at the local shopping plaza and windows boarded up. Just set up markets in local (car) parks instead, less overhead.
It seems to me the vast majority of the economy is simply non-essential fluff. For instance much that has to do with innovation/creation instead of maintenance is optional.
But I guess this is pretty obvious, maybe I'm missing something. Also it's a bit depressing to think about (I haven't even got to health care and state/govt employees) so I might take a break, I need to get some rest.
Alternatively maybe peak oil isn't even here yet. Perhaps the current crisis is simply due to over leveraging and the financial system will suffer a dramatic but brief collapse. A new banking/financial system will emerge and we'll be on our way yet. One can always dream...
Sorry to be clear its a race to the bottom between economic collapse and oil prices pushing economic collapse.
The question is can we have a fundamental shift in the demand curve thats large and fast enough to reduce demand such that you have a major drop in prices for oil ?
Housing stands out as unique in that demand for houses is highly elastic and it used a tremendous amount of resources and it was in a tremendous oversupply bubble and the product is very durable.
Other industries are less unique I agree that the auto industry should collapse and cause a demand shift however the US has embarked on the greatest experiment in moral hazard in history. By choosing to bail out the bankers its taken the path to self destruction. I assure you that if it now allowed the auto industry to fail as you describe that their would be riots in the streets. Everyone feels they are more deserving then the bankers of a bailout. Thus instead of this industry failing fast we probably will see it repeatedly propped up and a slower bleed of closed plants.
To get lower oil prices one would need a fast shift in the demand curve that beats depletion and export land.
This is actually a pretty hefty requirement as exports are falling fast for a number of reasons. Since oil inputs only represent a precentage of the overall energy inputs into any business then you have a sort of leverage situation you have to cause a quick surge in unemployment and destruction of a industry to get a marginal decrease in oil usage.
My point is two fold. Once the housing industry is fairly unique in being able to shut down fairly quickly as the economy turns but even here it took three years for it drop. Given it used a work force of undocumented workers that had difficulty finding jobs when it shut down this time you actually had people leave the country. This is not the case for most other industries. I could go on forever but the point is its one of the few industries that can fail fast and actually shift the demand curve substantially.
Next I really don't see anything else that can have this kind of impact looking at regions that have been in long term economic decline shows that indeed you don't get a dramatic change in demand with general economic slow down. It does not go up nor down.
Thus three conditions make me think we will see our economy pushed agianst the wall and that peak oil will play a increasing role in not just economic collapse but because of the path we have chosen effectively collapse of our civilization.
1.) Housing is a one shot rapid shift in the demand curve.
2.) Other industries will fail slower and slower than the rate of decline in imports.
3.) The government and citizens of the world have chosen to take the path of creating and infinite amount of debt to avoid and economic contraction.
Three is actually the real problem the economic model thats been chosen is the capitalistic/socialism model where the wealthy manage the distribution of wealth from socialistic injections of money from the government.
Thus the immense moral hazard created as the populace expects to be treated the same as the bankers.
This form of socialist capitalism is economic model used by fascist regimes. Its known to work over a period of years before the economy flames out. Given this its worth a read of how lack of oil drove these nations esp Japan. I hate to bring this up but now its no longer ambiguous we have chosen our fate.
Given three it becomes clear that we are not going to allow the economy to restructure instead we are goining to continue to pump even more money into keeping it going. Not necessarily growing but also not contracting enough to allow resources to be reallocated. Think about it this way a SUV produced in 2008 has far less embedded utility then one made in 2005. The one built in 2005 probably is useful at least through 2010. Every year we pour resources into building SUV's the real value add given peak oil and the economy is lower and lower. Its not that these products are not useful given the current nature of our economy its the case that the resource allocation does not result in a viable future. It does not help us in the least.
The government bailouts work to reinforce this status quo and keep capitol flowing into all the wrong places we can't get the demand shifted downwards enough to free up resources for other uses. The housing industry collapse is probably the only major downshift we will see and as home prices fall back to affordability levels and construction costs drop even this industry will begin to bottom out and transactions pick up.
I'm not saying housing will have some miraculous recovery but I am saying that the transaction rates will begin to increase even as the absolute price continues to fall as prices come back from insanity. The status quo encourages people to buy homes. This velocity puts a floor under how much of a demand shift for oil we can get from housing without more collapse.
Maybe thats the best way to describe it the demand curve for oil is closely correlated with the velocity of money not the absolute direction the economy is headed. Its really the number of transactions that take place with is tightly correlated with how much oil we use. This makes a lot of sense since intrinsic in any transaction we do is a certain amount of oil. Even and electronic transaction has a fractional amount of oil used in its execution. Our economic decisions will keep the transaction rate up and thus oil demand inflated.
Don Sailorman if you manage to read this then can you comment I think that the velocity of money is the critical link between oil demand and the economy.
There is much to be said about the velocity of money, but I don't want to write an essay on it, because in the longer term it doesn't matter much. Changes in the velocity of money typically reflect changes in financial markets and financial institutions; thus velocity is typically a dependent variable and not an independent variable. Clearly, the credit crunch reduced the velocity of money.
I agree with you 100% about the housing industry both being very important and being uniqe. The trigger to the economic crisis that the U.S. and European countries find themselves is the decline in housing prices that started more than a year ago.
One thing economists do not like about monetary policy is that tight money unduly targets the housing industry, while easy money tends to overstimulate residential construction (and other construction as well). More than anything else it was excessive growth in money and credit that lead to a speculative boom in real estate. Milton Friedman and other monetarist economists advocate abolishing central banks and having the M2 money supply increase at a steady rate that approximates long term real growth in GDP. (If there are long-term changes in the velocity of money, then the rate of growth in the money supply should, according to monetarists, be adjusted to reflect this change.) There is much to be said for the monetarist prescription. It would have made the recent boom in housing construction impossible, and hence we wouldn't have the even more recent crash in housing prices.
The changing velocity of money is not on my worry list. These changes reflect other things that are going in in the financial world and also in the real economy of land, labor, and physical capital.
To deal with Peak Oil I think a Greater Depression might help, because it would free up much land (natural resources), labor (especially engineers), and physical capital (tools, equipment, buildings) that could be used on building substitutes for fossil fuels, such as wind power and nuclear energy that could generate electricty that with a little bit of help could be turned into methanol from hydrogen and carbon dioxide.
Is this the right place to ask (it's related): what are TODders' opinion of Matt Simmons worries expressed at ASPO about the dangers of a run on oil, gasoline in particular, similar to a run on banks?
It scared the crap out of me.
Matt was expressing plain common sense. We saw the run on gasoline in action in the recent hurricane shortages. Make a decline in oil production lower product inventory enough and you get the exact same situation again, except that this time there will be no return to normal because shortages will be the new normal.
This is going to force a rationing system real quick after the first disruptions start. Governments cannot afford the food supply to be cut from the big cities or the price of food go up beyond a certain point because anarchy in the cities will ensue. Governments won't take any chance and make sure enough gasoline and diesel go to the farmers and truckers transporting food at a reasonable price. This means you won't have a normally functioning free market economy afterwards. Everything will be constrained by the rationing system, whatever it is.
Of course there is also the possibility that an incompetent government let the anarchy develop. I prefer rationing.
RR scribed above:
"But I think failure to understand how the refinery/pipeline/import system works - sometimes by people in positions of authority - can cause premature predictions of imminent disaster. I think we have far too many people who can't identify a wolf telling the villagers that the wolf is here. Many know that this is a pet peeve of mine."
I took that to mean that RR was taking issue with Simmons and "others" at ASPO who were -- and maybe still are -- alarmed at the probability of fuel shortages which would constitute a serious domestic crisis in the USA.
That is one reason I asked RR (in a response above) to give more Big Picture analysis.
RR's key post started out with the pet peeve about "A wolf telling the villagers that the wolf is here" and ended up with advice to monitor regional supplies so that one could avoid an unnecessary panicked rush to fill up at the gas pumps based on baseless rumor rather than on hard data.
I get the connection: crying wolf can be contagious, and then people are simply angry and confused, and refuse to deal with the real Wolf (Wolves?) At The Door: Peak Oil and a myriad of issues related to fossil fuel energy consumption.
My own sense is that the wolf has been here for quite awhile, and the Wolf is us.
We wolves do not respond well to data, information, and analysis. We respond well to immediate rewards of status and material comfort and (perceived) security. We respond to rants and tirades which locate the Wolf as a specific entity "out there, rather than within" or as being someone very different from ourselves and those most like ourselves.
I do this with RR -- I see him as a corporatist technician, albeit probably a cool guy! I realize that I work for Corporatists every day to pay the bills. I notice that the more tied in to the system as it is, the less one can imagine a future that is not intentionally defined or managed by the system that we have in place. I am a very low-level Wolfish, Corporatist Cog, but I am a part of the
self-devouring system in my own apparently smaller ways.
This gets back to the ways we are wired and how we project our own narratives onto "the data" as part of our scenarios of the likely future. Genetics plus life experience make us all religious and superstitious. We project our visions onto the future, and act accordingly.
While I see the world as ungovernable and dominated by Fascists who glorify and demand ever more violence to impose order which chiefly benefits themselves and those like them -- Shock and Awe, Genocide by other names, and Economic Blackmail -- I am aware that our violence and evil is infused into our species and civilization as a whole.
Our increasing violence reveals who we are and what we are willing to do for comfort, perceived security, and at the very least an identification with the dominant system which provides us with a vicarious sense of status.
Low gas prices and various petroleum products supply/demand issues are meaningful to most people only as they fit into the larger "story" that they tell themselves about how the world is.
The real numbers -- as important as they are -- mean very little to any of us, even though we might learn a great deal from them.
Perhaps this stubborn-ness to insist upon proclaiming "permanent shortages" every time we hit a serious bump in the supply/demand road is what bothers RR the most?
We are in a period where there will be lots of acute events of shortages as well as a long period of what we experience as milder but sustained supply/demand problems.
At any point in time, however -- and this is what I think Simmons and others try communicate -- we could be thrown unexpectedly into an acute shortage from which the complex system will not recover. We just do not know if or when that will happen, even though some think the probability of that kind of collapse is very high in the near term.
So the question for me is, how do we tell stories which can transform us from acting predominantly from our Wolfish simple short term perspective -- immediate comfort, sense of security, and sense of high status -- to acting from a longer term, less violent perspective?
If we cannot develop a new shared story, then we have only our Stone Age emotions, Medieval self images, and our God-like technology with which we will therefore use to huff, and puff, and blow our own house down!
Little Wolf Beggar here, signing off as Sleepless in Minneapolis
I took that to mean that RR was taking issue with Simmons and "others" at ASPO who were -- and maybe still are -- alarmed at the probability of fuel shortages which would constitute a serious domestic crisis in the USA.
Your assessment is partially correct. I took issue with those who were suggesting that the gas crisis at that time - was the beginning of something awful. I tried to put it in perspective as I saw it: In the long term the situation is truly awful, but in the short term we will start to climb out of this inventory hole we have dug.
I respect Simmons a lot - and he has been a major influence on me - but he sometimes speaks authoritatively when he is really just offering an opinion. I spoke to him following his talk, and I told him that I didn't agree with part of what he said. It wasn't just that I didn't agree with it, I knew it was wrong. Not to single him out, but there are people who have a disproportionate influence on people's thinking around energy, and for that reason they have a great responsibility to be sure they get it right. If he says - as he did - that we don't have a good idea of our inventories, what is the basis of that statement? How valid is that information? Was it presented as opinion, or as a factual statement?
I will repeat why I worry about this sort of thing. Try to take an objective view. Listen to someone a month ago who said that the gas shortages that had begun were about to spread like a virus across the country. What are you thinking today? The objective view is "That person really got that wrong/didn't know what they were talking about." After that happens a few times, people start to question what they say. They lose credibility, and credibility is damn important. Without it you have no hope of conveying the message about the serious situation we are in: You become just an alarmist always saying "crazy" things.
I have also been struggling with this issue...well, to be more honest, getting into horrible arguments with family members and experiencing strife like I've never seen. Also I've seen a lot of wishful thinking from some people ("the stock market will soon go back up to 13,000 and stay there").
My bitter conclusion: it's HOPELESS. People will only believe what they want to believe.
There is NOTHING you can do, so stop trying.
Yesterday I actually burst into tears thinking about the stressful fights I've had about this (more specifically, about what my family should do about this).
Give up and accept defeat. That is what I have concluded. Maybe people will change but there are huge odds that they WON'T.
How does that saying go..."grant me the courage to accept the things I cannot change...."
Human nature is one of those things you cannot change.
Pi,
I'm absolutely not trying to put down your feelings. But the truth is that this is all part of life. I've seen the same things you have in corporate life where I argued against stupid decisions but was over-ruled and, later, proved to be correct. I've seen friends with drug and alcohol problems refuse to admit they had a problem much-less get help.
I was talking to a good friend yesterday about his mother. She is 86 and needs 24 hour care. She doesn't want to go to a home but rather keep living in her house as long as possible. He and one sister support their mother. Two other sisters want her in a home. The two sisters lost the argument and have, essentially, divorced themselves from the family and refuse to have contact with anyone, including their mother.
I see few people in my rural community who are interested in surviving the coming collapse. They, like some of the people you have encountered believe that BAU will always be true. I considered putting on a seminar at my place entitled, So, You want to Survive covering possible courses of action and many specifics of what to do. I kicked it around in my mind for a long time and finally decided to forget it. Yes it might help some people but most would be lookie-loos who aren't serious. I saw it as a lot of effort for little return.
These sorts of things occur all the time and there isn't much we can do about it except accept the reality and go on with your own life.
Todd
I happen to be in a newly released movie called "Blind Spot" that could be useful for your situation.
http://www.blindspotdoc.com/
Towards the end of the film, the directors decided to use a lot of what I said regarding the difficulty individuals have discussing these topics within our social context.
A shortage of gasoline is bad, but what really scares me is a shortage of diesel.
With a shortage of gasoline, people just stop using their cars. It hurts, but it doesn't kill. People can still use their bike or walk. Life is disturbed but it can go on.
A shortage of diesel can quickly translate into a shortage of food, if only because trucks can't supply the groceries anymore and the farms producing the food are not always within a biking distance of downtown. Or alternatively the farmers can't run their tractors and loose their crop. Without food, cities will quickly become a living hell. If the shortage is prolonged, the casualties may grow very high.
There won't be a shortage of diesel in the non-price controlled economies. It might get really expensive, though.
The same could be said of gasoline and see what happened. Or are you saying the price gouging laws don't apply to diesel?
Good point. Okay, there can be "spot" shortages due to exigent circumstances.
Hello R-squared and fellow TODers,
To help avoid a repeat of 06/07: why don't we just move to the prepayment method for fuel that farmers are using for I-NPK far ahead of application?
From the California Farm Bureau Federation Website:
http://www.cfbf.com/agalert/AgAlertStory.cfm?ID=1159&ck=16E6A3326DD7D868...
-------------------------
With fertilizer prices doubling in the past two years and continuing to rise, farmers are now being asked to make commitments for their 2009 fertilizer needs and to pay a substantial amount, sometimes 100 percent, up front, said Terry Francl, AFBF senior economist.
"What is happening is that the credit function of these transactions is being shifted from the fertilizer producers and retail dealers to the farmers," he said. "The net result is that it increases the farmers' cost."
Blank said not only will fertilizer dealers likely pass along some of their higher credit costs to their farm customers, but in extreme cases, they may refuse to sell fertilizer to customers who have to pay on credit.
-----------------
I have discusses this before in similar postings such as my speculative Hells Angels' gas stations. I see no reason why it cannot be done on a massive statewide or nationwide scale.
For example: My Asphalt Wonderland of Arizona could pass a statewide bill where all owners of motor vehicles have to ante up $1,000, $2,000, or more per vehicle so that adequate emergency stores are husbanded in state.
We would prepay far ahead of actual use to prevent a major shortage problem for as long as possible. This is no different than the farmers prepaying 100% months and months ahead for I-NPK and their other inputs.
Then when a crunch hits--you know that you can still fuel for awhile because your area has a prepaid SPR. Arizona gets pipelined fuel from California and Texas, but they could cut us off at anytime. IMO, it only makes sense for Arizonans to cough up bigtime prepaid bucks for some level of protection.
Some more thinking on this AZ topic:
From memory, I think 60% of Az's fuel & natgas comes from CA. Let's say a massive earthquake nails CA and it will be 3 months before they get everything repaired enough to start sending FFs east. We in AZ would be hurting bigtime if we didn't have our own SPR vs just our present day JIT levels.
The AZ govt. could commandeer this native stockpile to keep fire, police, hospitals, and food moving during this three months. In my mind, it is no big deal to sit in the dark as long as water, food, medicine and protection continues.
It would be a luxurious three month vacation compared to what would be going on in earthquake-hit CA: massive water shortages from broken infrastructure networks, untamed fires from broken gaslines, terrible food shortages from collapsed freeways and bridges, rioting and mayhem galore as the cops give up [see Katrina NOLA], hospitals non-functioning, martial law, etc.
I am working on a project locally to develop storage facilities for grain and dry beans by having people prepay the costs for infrastructure development, food purchase and shipment, etc. Those who invest a lot of money up front can either choose to have a large storage allotment for years to come or trade their credits freely within the town. Food then becomes the backing for a local currency.
That's the idea at least.
Cool! I wish you get success. But remember, food will be more of a target for thieves. Thus consider storing some I-NPK as thieves generally don't know what it is, and are sure not interested in the doing the manual labor.
Jason,
I'm sure you are already familiar with Ralph Borsodi's Constants. If not you might want to do a search. His idea was that "money" would be backed by a commodity such as wheat.
The Heathcote commune in Virginia had a number of articles devoted to this in their magazine, Green Revolution, in the early '70s.
Todd
Jason:
I don't know about the local currency aspect, but the idea of a co-op grainery (I guess that would accurately describe it) is a good one. Perhaps that could be expanded/combined with a co-op grocery or a food buying club?
I see home & community gardens, CSPs, and local farmer's markets as covering part of what is needed when it comes to localized food. Now we need something to cover the non-perishable goods too.
I could envision a community co-op doing an annual bulk buy of grains, legumes, and other staples, storing them dry and secure from rodent or insect damage, and then selling them to members at a subscription price. Maybe even have a grain mill on the premises so that members could have their grains custom-ground into flour, thus saving them the need to have their own grain mills at home.
Recognizing that October 2008 has a lot of differences with October 2006, I wonder what sort of recurring event actually occurs in the U.S. around this time of year every 2/4 years?
And only one poster even mentioned this event, in a matter of fact and offhand way.
As stated, the differences between 2006 and 2008 are significant, but could it be that the efforts oriented to a lower price in a certain time frame were also overtaken by events?
Because let's be honest, the price drop is stunning, though in no way a contradiction to the idea that we have more or less reached peak - after all, production isn't increasing at this point, is it?
Of course, a second, and even more nebulous, partial explanation presents itself - just when massive investments in infrastructure moving away from fossil fuels started to look feasible, the price drops.
Actually, I think events are now overrunning any planning, making such observations more along the lines of idle speculation than serious exploration of cause and effect.
Nonetheless, price still strikes me as a stupid way to measure peak oil - the definition remains what comes out of the pipeline, and at this point, it isn't likely to be more for quite a while. The complex interface between geology and economics remains beyond practical prediction, but price only reflects a value placed by an invisible hand, and not actual quantity. (And I definitely second the idea that deleveraging is currently playing a major role in the price drop.)
What will be interesting to see is how many OPEC members can cheat on quotas, regardless of their desire to do so. The red queen is still in the running, after all. Even more interesting is what happens if one or more members of OPEC can't handle social unrest related to rapidly sinking prices for crude.
expat,
If quantified properly prices might still give some support to PO. But it has to be done on long cycle with short term price spikes and dips averaged out. Even if oil prices stay at current levels thru the end of the year the average 2008 price will still be greater than 2007 which was higher then 2006 which was higher than 2005. An even longer cycle might be more reliable -- a 2 or 3 year running average. Of course, the MSM has no interest in such measurements...not enough drama.
Above ground factors (such as true OPEC discipline/military conflict) may have an ever greater impact on oil pricing then the physical aspects of PO. PO will always remain in the background as the ultimate control IMO but as competition for physical resources increases conversations regarding reserve levels and production rates might receive less coverage then social unrest and military actions.