Why Oil Shortages May Cause Price Decreases, Rather than Increases
Posted by Gail the Actuary on May 18, 2009 - 10:15am
A lot of people think peak oil is no longer a problem because prices are no longer in the stratosphere. It seems to me that standard economic models start breaking down when production for a commodity like oil starts becoming difficult to expand and there are no good substitutes. We have been taught:
and
As long as production of oil can be expanded easily, relationship (1) holds. But once oil production can no longer be easily expanded, the relationship doesn't work. Relationship (2) would work, if there were a good, cheap, easily expanded substitute for oil, but there really isn't, so it doesn't hold either.
When these relationships don't hold, there are several other relationships that become more important. It seems to me that these relationships help explain our current price situation.
Once the price of oil started going up, one type of feedback loop looked like this:
Another looked like this:
Steve from Virginia pointed out, through his analysis of the minutes of the Federal Reserve Open Market Committee, that there was also a feedback loop that looked like this:
All of these feedback loops led to reductions in demand for commodities of all types, including oil. With lower demand, prices dropped, not only for oil, but for natural gas, coal, uranium, and most metals.
Feedback loops 4 and 5 led to damage to the lending system. One problem was that banks were less able to lend because of reduction in capital because of defaults and because of fear that new loans would default as well. Another was that structured securities became much more difficult to sell, because it became clear that the system was not set up to handle large numbers of defaults. These changes popped the "debt bubble".
As a result, the total amount of credit began to fall--not just bank issued debt, but credit from other sources as well:
Once the credit markets were damaged, there was a very significant impact on demand for oil, because credit is used at many points in building new products. Manufacturers often use credit to expand their factories; suppliers need credit to buy their raw materials; and purchasers of end products (like homes and automobiles) often use credit. A reduction in available credit could therefore result in a steep drop in demand.
It was not difficult to damage the capacity of credit markets, because the amount of debt had been expanding completely out of proportion to the amount of underlying assets (fed by cheap credit, aimed at keeping this expansion up, so no one would notice the lack of real growth). Also, credit markets needed economic growth in order for default rates to stay low. Once oil production flattened, default rates rose because of slower economic growth and higher oil prices. Without growth in oil production, economic growth couldn't continue, default rates rose, and the unwinding debt cycle took on a life of its own. The feedback loop looked something like this:
Note that with this feed-back loop, there is no longer a need for high oil prices to drive the credit unwind. The credit unwind is now self-reinforcing, and it seems to me that it is the driving force behind the current reduction in demand for oil and other commodities. The debt unwind has been hidden for a while now by all of the bailout activity, but will soon back from hiding, as it becomes impossible to cover up the extent of the continuing defaults. I expect the impact of the debt unwind on oil prices will continue to be generally negative for quite some time as the unwind continues.
Besides the debt unwind, there are other factors that can be expected to have an impact on the price of oil. One is how well the purchasing power of the dollar holds up. If the purchasing value of the dollar drops, the price of oil could rise, whether or not demand rises.
Availability of storage for oil is another factor that may affect oil prices in the future. Rune Lickvern wrote a post about the possibility of inadequate storage capacity suddenly causing a drop in oil prices.
We cannot know precisely what path oil prices will take in the future, but one past example that is somewhat similar showed widely fluctuating prices. When whale oil (used for lamps) became scarce at the end of the 19th century, its prices fluctuated widely. The average price was higher than prior to the peak in production, but there was considerable variation:
Oil prices are likely to follow path that is somewhat different from those of whale oil, because the circumstances are different now (no available substitute, widespread economic impact). The whale oil model gives further evidence, though, that the price path isn't just upward. Other feedback loops besides those postulated by classical economists can also be important.
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How has recent oil consumption fared compared with consumption of commodities of all other types? Seems that global oil use has not gone down as much as, say, timber or steel. Is it helpful to include oil with all commodities when anticipating the price impact of declining demand for new homes, cars, and other durable goods?
Edit: here's some numbers...Feb 2009 steel consumption down 44% from 2008; Brazil's timber exports down 22% to 66% March 2008 to 2009. Oil use, in contrast, appears to be flat.
Timber data: http://www.itto.int/en/mis_detail/
Steel data (pdf):
http://hq-web03.ita.doc.gov/License/Surge.nsf/webfiles/SteelMillDevelopments/$file/May09%20exec%20summ.pdf?openelement
First of all, thatks Gail for an interesting and informative article! There is a lot to discuss here, probably more than can be digested in a short comment.
Some commodities such as metals (gold, platinum, copper and palladium)and energy have increased while those such as lumber and out-of-fashion metals such as zinc have swooned. What does this indicate? Why doesn't zinc get any love?
There are several basic questions about the current state of the economy that are still controvercial, such as:
- Are we experiencing inflation or deflation?
- Will there be growth or more recession?
- Will energy prices go up or down?
- What energy price level causes damage to the overall economy ... and ...
- What energy price level causes changes in behavior?
Even after two years of contraction there is no consensus about whether there is a background of inflation or deflation. Increase in some commodieties prices indicates inflation as investors (who have all the money, now) seek to swap devalueing currencies for assets that hold value over time such as gold.
Ordinarily, real estate would fall into this 'inflation hedge' category - and the central banks both here and abroad would also like this to happen - but massive overbuilding and the consequent narrowing of real estate's particular usefulness by the development process leaves real estate with a lot more room to fall in relative price. By particular usefulness I mean that a bit of real estate turned into a strip mall can only be easily used as a strip mall, not as a factory or a wheat field, for instance. This being the case and the large increases worldwide in unemployment must be taken together as deflationary.
- Are we experiencing inflation or deflation? ANSWER; Both.
One thing that has changed is how commodities such as oil relate to the overall cost structure of the economy as a whole. Not that long ago, the issue of energy production was one of maintaining profitable price levels - of managing very large surpluses. The strategy was to hold capacity off the market as was done in Iraq and Saudi Arabia during the late 1980s and early 1990s so that the cheaper oil did not cut into (national) energy company profits. Understand that the economic infrastructure we inherit has been built with exceptionally cheap inputs. Cheap energy is just one item at the foundation of the productivity pyramid. These inputs included near- free water, $10 oil, $.03 kiloatt/hour electricity, cheap farmland to develop, and cheap highway and utility construction costs, cheap 'tools' such as cars and trucks and free air and rivers and streams to dump the waste into. That paradigm ended in the late 1990's and from that point no energy source was held off the market except for margnal percentages such as are taking place with OPEC producers cutting production slightly to iron out price fluctuations. What defines capacity is the overall rate of depletion relative to the the discovery and exploitation of large fields such as those in Central Asia and off the coasts of Brazil and Cuba (?). The $64 trillion question is whether the new fields can provide sufficient oil to offet depletion. This fundamental and the second derivative relationship to overall demand is now the factor which determines not just a few of the relative price levels within the world's economies but most and soon all the relative price levels.
The last ten years or so are therefor a period providing entirely new ground rules that governments, banks, consumers and investors, worldwide are currently only becoming dimly aware of.
- Will there be growth or more recession? ANSWER; a longer and deeper recession. This suggests lower commodity prices ... but ain't necessarily so!
Another way to look at this is that previous dramatic oil price increases have had exogenous causes that removed spare capacity from the market - the 1973 Yom Kippur war, the Iranian revolution in 1979, the Iran - Iraq war from 1980- 1988, the Iraqi invasion of Kuwait in 1991, hurricanes in the Gulf of Mexico in 2005 and last year - the situation after 1998 with steadily rising prices culminating with a large and painful 'spike' has largely an endogenous cause. Increasing demand along with natural depletion - rather than politics or weather - has in effect removed spare capacity. Neither finance nor inflation increased capacity. While the mechanics of constrained supply v. depletion and increased demand are no news here, the surprise is that this fundamental has been priced by the market beginning over ten years ago.
As such this represents a sea- change or even a tectonic change; one which places us 'users' of the modern world squarely in the middle of a process that started a long time ago. In other words, the Peak Oil phenomenon is not something that can be considered later. It has already begun and the economic fallout has also begun. Experts have said that the peak will only be seen from a perspective looking into the past. Look at the rear- view. The economic peak is there ... in 1998.
From here out, the foundation of all other value relationships must rest on the energy supply/demand fundamental. Exogenous price inputs have not disappeared, these will be added on top of the fundamental. All the differences between currencies and between interest rates and between convenience rates will be piled on top of the energy fundamental.
Price trends are not continuous. Rising interest rates - triggered by rising energy prices - caused a breakdown in finance in 2003-2005. Commodity prices along with oil decoupled from other asset prices such as real estate or bonds. Energy prices spiked because investors looking to 'park' cash or trying to offset credit losses flooded into 'can't miss' commodities across the board. When prices became unsustainable both at the cash level - because of recession and bottoming demand - as well as at the exchanges level - because of government threats to curb speculation - commodity prices collapsed. Now, energy prices have returned to the mark that existed more or less in line before the 2008 spike.
- Will energy prices go up or down? ANSWER; In the long term and relative to everyhing else, energy will become more costly.
If the government had allowed the financial sector to fail and set about to reconstruct a replacement sector (presumeably one without the defects and corruption of the current sector) energy prices would probably reflect very small demand - the country and perhaps most of the world would be in a very deep and serious recession. In such a scenario, it would be realistic to consider that most demand would not increase until the new finance structre was up and running and legacy debts and insolvencies cleared away by bankruptcy. This probably wouldn't have taken place before 2011. In such a scenario, a re-thinking of the exponential growth model would cause demand for crude - worldwide? - to moderate, keeping the fundamental supply vs. demand influence on relative prices under restraint.
This choice was not made by ANY government or finance sector and vast sums of liquidity have been shoveled at finance in an attempt to keep it afloat. While the original shock of deflationary collapse held prices low for a brief period (and Brad DeLong has a model that indicated a certain momentum oscillator effect taking place) the basic supply v. demand relationship has recovered its fundamental position at the bottom of the economic productivity pyramid. Partly, this is because the OPEC producers did indeed make marginal cuts in production to keep prices from falling further than $35/bbl.
The average yearly price of oil after 2003 has been over $42 a barrel with some fluctuation. This represents a 'stairstep' increase of almost 100%, from slightly over/under $21 a barrel for the period from 1986 - 2002 with very low prices ending in 1998 to early 1999 (see below).
(EIA data)
(Graph modified by me)
The 'support level' indicates prices overall trending upward from the lowest price in 1998-99. This 'trend line' was not broken even during the sharp commodity sell- off in 2008. Since neither finance nor governments (or central banks) have changed their approach to managing the world economy, nor has finance increased capacity ... there is nothing to alter the fundamental, bottom- of- the- pyramid relationship of supply versus demand. This suggests a fairly long- termed 'Bull Market' for crude.
A lot has changed since the beginning of 2007. Credit formation in the finance sector has shifted to credit formation directly by central banks. Since the crisis began in 2007 the various central banks have cut interest rates, injected trillions of dollars,yen, yuan and euros into finance in an effort to keep finance and world economies from out and out collapse. Clearly this effort has worked in that the markets still appear to function - in a zombie sort of way. Previously, credit was leveraged from bank deposits (in any currency into the same currency or into derivatives or securities and thence into other currencies) and amplified by velocity. (See the 'Quantity Theory of Money') This has changed with the crisis.
With the current difficulties in banking there is small increase in credit by fractional reserve mechanisms and velocity is constrained. A reason for small velocity and low credit creation is because there is little public participation - no 'Boom' to buy into and few valuable assets to swap back and forth. What little attempts to create some velocity in both equity and the energy markets is done by large institutions, trading is done with central bank credit. A consequence of this economic 'stimulus' is inflating (as in inflation) prices of stocks and oil ... this market constrained inflation is added to and amplifies the supply v. demand fundamental. Oil prices have gone up and so have prices at the pump.
Prices will likely continue to increase as long as the central banks keep printing money. The short term end of price increases will be when the high energy costs bankrupt enough businesses to trigger the next round of deleveraging and deflation. This in turn will constrain demand and oil prices will dive. After a bottoming out, the relentless fundamental will take hold again and the cycle will repeat. It will continue to repeat until everyone is clear on the fundamental relationship and steps are taken ... or until all businesses in the country have shut down.
- What energy price level causes damage to the overall economy ... and ...
- What energy price level causes changes in behavior? ANSWER; This remains to be seen but it probably isn't all that high.
What makes this final set of questions so hard to answer is that damage energy prices do to the economy lies at the economic margins rather than at more visible levels. People look at pump prices and say, "$2.30 a gallon, that's not so expensive!" Such a price may not effect individual consumers that much but similar price increases embedded at every step of the product supply chain amplify increases at other links. The cumulative effect makes products either unprofitable or unaffordable.
Loss of profits ->
Business failures ->
Increased unemployment ->
Cuts in consumer spending ...
Business profits are spent on petroleum. Petroleum prices shoulder aside investment needs. Speculative investment 'opportunities' are created to replace ordinary productive business rendered less- or unprofitable by increased input prices. That is, financial 'Home Runs' are sought to offest increasing unprofitablity elsewhere. The effests ricochet overseas. This is what is being seen currently despite massive stimulus and monetary easing; widespread business failures, high and increasing prices for some goods such as food, fertilizer and hardware, and large and widespread unemployment against a background of almost desperate financial speculation! Prices can decline over shorter terms because of deflationary episoces and temporary overcapacity ... but the long term trend appears to be UP.
Welcome to Peak Oil ... 1998!
Thanks for your ideas!
I think the effect will be continuing recession/depression, regardless of whether we have inflation or deflation.
It seems like there will be some type of change in the not too distant future that will suddenly make things worse--the temporary optimism will go away, and the fact that we cannot meet our promises will become more clear to our creditors. I don't think we can just extrapolate from where were are now.
Yes, the 'Powers That Be' have simply bought a little time ... with trillions of dollars.
Excuse me while I go outside and see if I can find some temporary optimism!
:)
Yes, nice work. We seem to have gotten two great articles for the price of one, here.
On your graph of the price of imported crude, what would you say the "economic peak" corresponds to? Is it mostly an accident of over production in the '90's? Or could that point represent peak available energy?
I was rummaging through the different peak oil websites a few months ago and came across an interveiw; I don't recall at the moment whether it was Matt Simmons or M. Hubbert ... it may have been Hubbert because he gave a lot of talks and presentations to energy company executives and engineers, particularly during the early 1970's. I recall the speaker was recollecting a conversation explaining the mechanism of peak oil to an executive; how the US oil production at the time was headed for a relentless and irreversable decline.
The executive declared this to be impossible! He pointed to the fact that the country was 'awash' in oil, that is was cheaper than it had ever been. There couldn't possibly be a decline in production. As Hubbert traveled the country - as Matt Simmons does now - explaining depletion and its effects, his listeners had never entertained the concept of general depletion. They were surprised, angry and in denial ... and these were energy company professionals!
Later on, the speaker, I actually believe it was Hubbert (I'll find it at some point) reflected that at the peak in production, oil would be most plentiful and prices would be lowest.
At that point I simply started looking at prices. The remarks made absolute, perfect sense. Conventionally, the measure of peak is a matter of physical production measured in barrels of liquid at either the wellhead, the shipping terminal or the refinery. The amounts are totaled and changes in physical production are measured against the 'Hubbert Curve'.
This is an excellent method to measure depletion. It has the benefit of removing production rates from the realm of conjecture and into that of data. It's hard to argue against physics. The 'bottom line' of peak production is rate of change; actual physical decline. A problem with measuring physical production is the demand dynamic is in the background. In the ambit of physical production, oil out of the ground will be used eventually. Demand doesn't effect production unless if declines to where it constrains that production - that is producers choose to leave oil in the ground because they cannot sell it. (NOTE: The opposite dynamic is also true!)
From the physical standpoint demand is static. A barrel produced will be consumed. Consumption makes use of all production. Storage relative to the production stream is small. Consumers can buy some oil and set it aside, but eventually all oil becomes atmospheric waste.
Market price measures the dynamic relationship of supply to consumption. The aim is to locate a change in trend, where the supply - demand dynamic changes from favoring the consumer to favoring the producer. In the market the intensity of demand is measurable. Consumption is auctioned. Marginal utility allows for consumers to bid prices higher than physical fundamentals might otherwise indicate. Markets calculate many sets of conditions. The price falls if the rate of consumption falls faster than the rate of supply, even if that rate is also falling. If the rate of production increases and exceeds the rate of consumption - even if the consumption rate is increasing - the price still falls. When the consumption rate rises faster than the rate of supply - even if the rate of supply is rising - the price rises. If supply declines and demand is steady or that rate falls slower than the decline of production, the price will also rise. The first set of conditions favors the consumer, the second set favors the producer.
Since every barrel of oil is bought and sold the price is an a accurate measure of the dynamic supply - demand relationship.
The rate of supply was very great and increasing relative to the (increasing) rate of consumption from 1985 until the late 1990's, During that period the the price declined. Afterwards, the rate of consumption increased faster than the rate of (increasing) production. Prices were bid higher. The 'inflection point' - where prices declined to the lowest point and then rose - was Economic Peak Oil, where supply was greatest relative to damand as measured in money within the marketplace. Prior to that point prices favored consumers, after that point prices favored producers.
The production rate exceeding the rate of consumption required a very low price to 'clear the market' Increased demand relative to increasing supply was reflected in steadily increasing prices. The price trend was exactly the same as if physical production declined!
Within the dynamic supply-demand relationship it does not matter if supply increases. Prices will increase if demand increases faster.
Many experts including Hubbert himself have stated that the real peak could only be determined long after the fact. As seen through the prism of price the largest supply relative to demand was at the end of 1998 until the first months of 1999. To my mind, this was 'peak oil'. From that point forward up until this minute the rate of consumption has outstripped to the rate of production allowing demand to bid up the price of relatively diminishing supply. The plentiful oil of 1998 and the cheap price of 25 cents a gallon of crude is likely never to be seen again. In this context, it doens't matter whether physical production increases of decreases; it's irrelevant. What matters is that consumption has unbalanced the pricing mechanism and tilted it in favor of production.
At the end of 2008 with prices plummeting and the overhang of 80 millions bpd of production overhanging the market, prior to any OPEC production cuts ... with the possible price of $5 a barrel looming over the horizon ... the price never fell below the longer termed trend line! The support level held; at $35 a barrel. Compared to prices of $11 a barrel ten years previous, the difference is a 3X increase! Now, prices have almost doubled again from that level.
A couple of things to consider ...
Peak Oil to the man in the street is a matter of price. The economic measure is more useful to people than is physical production. One person cannot grasp world fuel production, it's an abstract. Physical depletion is simply too big and too complex - and awful - to easily grasp. Even professionals have difficulties with the concept, as Hubbert and Simmons can both attest.
Consideration must be given to the state of production and demand. Both must be mature, that is supply and demand at high rates without distractions in the marketplace such as wars, embargoes or financial bubbles. Measuring supply v. demand by dollars in 1968 would have been pointless since US production was peaking and world demand was slight. During the period 1985 - 2002 there were few disruptions other than Saddam's adventure in Kuwait. both production and demand worldwide were mature and huge. Production levels were similar to those current; the interening years have not brought to light exponential increases in available oil. There are no new 'Super- giant' oil fields to replace those now producing in Saudi Arabia and Mexico.
Peak oil taking place in the past explains a lot of current problems and government strategies. Peak oil means basic, energy intensive manufacturing becomes less profitable over time. Better to send it to China and let them attempt to make use of it with cheaper labor ... or fail. Peak oil means that abstract speculation in financial securities - rather than making things in factories - is the only way for America to grow at a rate that allows our current standard of living. Under the circumstances, supporting finance and credit becomes a life or death political issue. Many of the credit and business disruptions of the past two years (and the follies leading up to them) are reasonable in a post- peak context.
Ten years into Peak Oil also explains the frenzy of capitalists worldwide to 'cash out'. Forward looking investors cannot afford to wait until the very end ... when bits and pieces of the current status quo will be worthless? What use is a private jet when fuel cannot be found for it? May as well ditch in now when it can gain a good price than wait. The manipulations taking place on Wall Street and other markets reflect this acknowledgement. Traders might not articulate the idea that 'Peak Oil happened at the end of the 1990's' but they can trade it and rationalize, later.
Ten years post- peak also means that time is running short (if it hasn't run out already). Exponential demand growth will consume remaining - harder to get - fuels in a staggeringly short time. In five years the full weight of out and out permanent shortages will fall with smashing weight upon the world's industrial economies. There is not sufficient time remaining to deploy the reactors, windmills, solar cells or electric cars ... particularly when there is no urgency to effect the change. The task is to replace the built world ... constructed over the past 60 years.
Unbelievable!
I like the idea that the peak in availability of oil occurred when the price was lowest, back in the late 1990s.
Now, with all of these funny interactions going on, the price situation is very confusing for the lay person. Certainly there can't be any problem. Prices are relatively low.
I am not sure that it is possible to replace the built world, with declining energy supplies. I wish someone would come up with a model comparing the amount of available energy prospectively, and how much of this energy would be required for replacing built infrastructure. Of course some of the energy is solar and wind, and continues to be added to earth's resources--but the infrastructure to capture it has to be manufactured has to be manufactured, and provides limits on the amount available to society.
I'll find that interview. It might even be over here, somewhere.
The problem with replacing the built world is there is no consensus about how world should be. There are lots of tentative inquiries which are steps in the right direction. I tell people they hae to figure out how to live in the nineteenth century otherwise they will wind up in the fourteenth century!
I like peak availability. It's like my chlid! The big complaint I have with it in the 1990's means the time to effectively act is past - the opportunity to take appropriate action 'come and gone' before anyone noticed there was a problem! This indicates another level of problem or 'Probleme' (for problem and meme) beyond the level of the 'Wicked Problem'. to that of the 'Hyper- wicked Problem'.
A Hyper- wicked problem is one whose existence isn't even discovered until after the opportunity to address it has passed. This kind of hyper- wicked problems are wrapped in existential paradoxes ... like the discussion I had here a little with aangel about the oil price level that would finance new production or energy alternatives being far above the price level that causes fatal destruction to the economy itself. I suspect a lot of these kinds of 'Problemes' will be turning up like bad pennies in the very near future.
There is no rule book for the situation we find ourselves in right now, frankly.
Oil needs to be used to manage the transition and keep people fed. Another problem is 'ramping up' alternatives is more energy wasteful with the goal or intent of increased alternatives not guaranteed. Throwing money (energy) at fusion or hydrogen - for instance - or at wave power might not return anything on the investments and the time and invested energy would be lost. This is itself another wicked problem, as the risk attached to an investment might be greater than any return yet discovering this requires the investment. This gears into your remark about replacing infrastucture.
I think your question could be better answered if people had a more comprehensive collection of skills. Creative skills are a good substitute for the brute force and mechanical leverage of cheap energy. Having gone in the one direction, it's been easy to unlearn the skills needed to go the other direction. This makes creating your model very difficult. People can grasp the need but cannot calculate the next step ...
This is all very interesting stuff -but possibly not the general thought of concept of "Peak Oil" (which I assume most people take to mean the point of maximum production). Your explanation of Economic Peak -if I am correct- is the point at which additional incremental barrel costs beging their inevitable rise after years of decline. And this occured at the end of the 90s. Very interesting.
It would also explain the rise in commodity prices since then... Any comments on the interelationship between Commodities and Oil 'PEPO' (Post Economic PO)
Nick.
"I wish someone would come up with a model comparing the amount of available energy prospectively"
Shortonoil over at the PO forums has an energy availability model according to which we are now at about 12% (as I recall) of remaining energy out of the original total of available recoverable energy we started with. This is a pretty grim picture of where we are, even for people used to the grimness of peak oil.
I don't think there is any remote posibility of "replacing built infrastructure." We will be learning to live (and die) without a lot of things we took for granted. Presumably the energy required to replace the built infrastructure would be comprable to the amount needed to build it in the first place. And if shortonoil is right, it presumably took much of the 88% of originally available energy we have used so far to build it.
Not bloody likely that we can do the same job with the 12% we have left.
Perfect post Steve !
Gail I actually don't see this in the short term believe it or not I think we have a year or two where we deal with our current bogey men.
With this said I'd not be surprised to see Goldman Sachs take over a major bank my best guess is BofA. And I think this will the start of consolidation and break up of some banks.
This Stress test was a game and the Banks actually failed they declared themselves solvent and now the Government is in a position to start nationalizing "a few bad apples".
I think Citi will also be broken up before finally swallowed. The real winner banks GS and MS will slowly digest their kill.
But this won't be seen as a bad thing but a return to stability and the market will respond positively to this. And technically it is positive. Eliminating BofA will send a message that the US is cleaning up its house and you can trust it.
Beyond this we will simply be dealing with falling home values steady credit defaults and high unemployment. CRE will of course start failing in a big way but its more of the same.
In a weird kind of way our economy has already adjusted to this we have already absorbed most of the economic fallout. Not that there is not a lot more to absorb but by simply being more of the same it won't have a jarring economic effect.
Even if oil hits 150 or 200 people will think its just another temporary spike.
I believe we will sort of muddle through like this for 1-2 years. I think that the monetary inflation will send oil price to the 200 mark but I think that people initially won't care.
Now depending on when prices cross 150 a barrel to new highs at that point if they remain over 150 for a year then and only then will this muddle along situation start to break down.
We are in a lot of ways entering what you can think of as the python squeezing stage where the economy continues to function it just gets squeezed.
I think that bottom calling and green shoots will be present this year and next. Obviously companies that have cut to the bone and finally been forced to actually try and operate efficiently will probably be able to turn out small profits even with rising energy prices.
On this blog we often discuss the energy waste in the system but the structural waste in most companies is orders of magnitude worse. We have plenty of room to streamline business practices. Those that do will survive those that don't will die.
And of course we have at least 20 years of inflation induced equity gains in the housing market that can be rolled back.
So I just overall see this literally taking time to happen at at every step of the way from now on out people will be calling a bottom ever more stridently.
Now I think we will have more regional Detroits obviously most of the rest of the cities that are into auto manufacturing are joining Detroit in becoming dysfunctional. But these will be dismissed. I think for example Oregon will get hammered. But these will be seen as regional issues or industrial shifts not as the start of a widespread collapse. And I think we probably will see riots in at least one major US city over the next two years.
Not until 2011 will these regional collapses begin to spread and expand into social collapse.
I'm guessing that we will end 2009 with unemployment at 12% and oil over 100. 2010 will I think see oil go over 200 and unemployment inch up to 14% or even decline back to 10% but with more and more Americans taking any job they can get so underemployment will be huge.
Only in 2011 when the collapse of housing markets becomes effectively national and its obvious that things are getting worse will wide social disturbances become a problem.
Also I think that cities and states will hold out through most of 2009 and into 2010 before finally seriously cutting spending. The problem of course is its too little and to late and of course they will probably drastically cut police forces to scare the tax payers. Well this will begin to backfire in 2011 when cities find they are calling in the National Guard to deal with civil disturbances. And this scenario could easily take longer than this we could sort of stabilize in 2010-2011 and then finally fall apart in 2012-2013.
Its just going to take time for the structural failures to build up and finally collapse this is not a fast process. We still have a long way to fall before the system finally begins to break down for real. And I really don't see that the forces driving the situation are any different from today its just more of the same just a bit worse month by month and year by year.
And yes once oil prices are sky high for some time we will see energy conservation start and a belated attempt to deal with the energy crisis but all this will do is work to slow the collapse rate say for a year or two.
The problem is by the time we finally decide to change the social network will be to far gone to prevent widespread collapse. Still its simply going to take time. A lot has to happen and most of the forces are slow. Real Estate is intrinsically illiquid so it takes time to collapse. The continued support for the banking system will ensure it fails slowly.
Rising energy costs will be seen as temporary. Socially we will hold out for hope far longer than we should. But because the system will last longer than it probably technically should when it finally does crumble I think we will find that it had truly become a house of cards and topples easily.
So in a sense I disagree I think we can indeed extrapolate where we are today out for at least two if not four years. However in doing so it ensures that when what your saying finally does happen it will be decisive our creditors will not just turn away but flee.
In a sense you could even see that we are given one last chance to change. And I of course believe we simply won't but will try to get back the old ways and fail. So in this sense only after America's attempt at recovery has obviously failed will we finally see the current system break down. Until we have tried to recover and then failed the world will be willing to give us a chance.
I think the next two years will see on fake recovery after another and only near the end will the confidence really be lost.
Memmel
I could not agree more with your predictions for the near term future. We have simply left it too late to make any significant changes to the energy depleted world we face.
I have recently undertaken an exercise in forecasting the conversion of the Australian economy onto a completly renewable base. The figures are sobering to say the least. It works out to be around 370% of GDP. I don't imagine that the US numbers would be greatly different.
Making a sizable dent in this is just not possible while we continue with a paradigm of exponential growth and BAU. The probable scenario of rapid, cyclical oil price spikes followed by crashes will further discourage private investment in alternatives. Governments will continue to use the funds they can either borrow or print to try to prop up the financial sector because of both, the influence from this sector and the fact that it now represents the largest employer in most western economies. It is a bit hard to see any path forward without there first being a major social discontinuity.
370% of GDP! That is amazing.
It sounds like a discussion of that calculation would make an interesting post. Write to me if you are interested at GailTverberg at comcast dot net.
Steve, I like your post even though it takes some 'getting your head round'. I would ask if you have any proof that newly created money is finding its way into stocks and oil (and not just 'parked' money from the way down...)?
Also any thoughts on assets likely to do well (I have my list!)
I have sought the 'non-discretional' ones I associate with PO -Oil, Gas, certain minerals and companies likely to do well + of course Gold .
Nick.
wisco,
There are going to be differences with different commodities, both in the amount of reduction in demand and the impact on prices. And this will change over time.
If there are fewer houses built, there will need to be less lumber transported to construction sites, and less of all the things that go into the house - insulation, wiring, appliances, plumbing. Oil will be used in production and transportation of all of these things. So will natural gas. Very small changes in demand of energy products can have a big impact on prices, so this may have as big impact as a larger cut in say, steel production.
Gail,
a better analogy may be that of whale BONE. Whale Oil found a substitute but whale bone didn't -I wonder whether the expense of a corset was a major reason it went out of fashion? :o)
Nick.
Hello Noutram,
Thxs for that chart!
There are No Substitutes to the Elements NPK for photosynthesis so unless we ramp O-NPK recycling bigtime, we should expect I-NPK to get increasingly unaffordable. Bill Doyle, POT's Topdog, is already on record that he is worried about farmers curtailing total acreage and also reducing the amount of I-NPK applied per acre. See my posting in yesterday's DB. This could be a cascading blowback of the worst kind.
"There are No Substitutes to the Elements NPK for photosynthesis"
Well, actually there is. It's commonly called shit and piss.
We are pouring so much animal and human manure into the streams and rivers that they choke to death from over fertilization while at the same time we claim there is no fertilizer! Oh, did I mention that as a side effect we let enough methane vapor off into the atmosphere to provide power for a hundred cities (that's a guess, it is probably more)...but as long as fertilizer and methane are viewed as more expensive to retain than producing new energy and fertilizer is, that's the way it will go...there's plenty of room for thought on this stuff because the room sure isn't crowded with any...
RC
It's a another question of scale as to how to concentrate widespread dilute sources of NPK into usable materials for broadacre application. How much will it cost to collect at municiapl sewerage treatment plants and distribute back to farmers? Can it be conentrated enough so that the bulk of materials being transported is sufficiently dense to justify trucking it? How much energy will it use? Can the methane from the the same STP be used to run it all? OR should we all jsut piss in a bottle and shit in our composting toilets and use the produce to fertilise local gardens and small scale nearby farms? I don't really mind eating food fertilised with this stuff as long as we eliminate all pharmaceuticals from the stream.
What one really needs to do is move people out of the cities to the land, and recycle waste of the local people on the land locally. I am afraid that ultimately composting will need to be done by nature.
I don't about what one does with all the waste products of the cows, pigs and chickens. Perhaps if we ate less meat, we would not need as much grain and wouldn't need to recycle as much.
I agree about eating less meat, being a vegetarian myself. But really the problems with cow and chicken manure are more from mass contained production more than from small, well managed, free range operations.
Chickens let out into the garden will eat harmful bugs even while they provide the soil with nitrogen from their scat.
Michael Pallen in Omnivor's Dilemma has an interesting chapter on a farmer who pastures his cows in one field, then lets the cow pies sit for just enough time for the maggot to start to breed. Then he lets his chickens out in the same field and they go after the maggots and in the process scatter the cow pies into the grass, adding their own rich scat into the mix in the process. The grass then gets greener, and so he then lets the cows back out to feed... Quite ingenious, really.
Pigs produce so much sh*t that I think only quite small operations can avoid enormous stench, pollution and other problems.
And of course Jenkins book on humanure should become a bible in every household.
In regard to the recycling of fertilizer please visit a company I am exited about.
http://www.vermitech.com/
Thousands of tonnes of sewerage turned into $50/a kilo black gold for people who grow "Tomatoes"
http://en.wikipedia.org/wiki/Whale_bone
Buggy whip demand also dropped off early in the 20th Century.
What are the chances of getting a whale and an oil well in the same view? Low, but not impossible.
Disappointing, there was no giant squid to fight the whale ;-)
Noutram,
Regarding whale bones, as you say, corsets ultimately went out of fashion. So did chrome bumpers on cars, for the same reason.
In a way, there was a substitution here as well--different fashion.
The catch with oil is that we don't have good scalable alternatives. It makes the situation much more difficult.
The bone was substituted by sprung steel ribs in the corsets but woven quills, cane or plastics have been used. So probably not the bast example either.
While these feed back loops might be true for the U.S., they may not apply to the oil market which is global. A lot of countries did more or less the same thing as the Americans, but to a lessor extent.
But some did not such as China and it is becoming more important in oil and commodity pricing. It is going around the world buying up commodity suppliers and locking in supplies.
Clearly China is not having the same feed back loop(s) as the U.S.. They are suffering the effects of the American debacle but for different reasons. Car sales are still booming in China and I read oil imports were up 14% in April.
The U.S. is not the world and things we experience may not affect the oil price since oil is an international market. If China expands usage, as is currently happening, oil prices may rise no matter the decline in the U.S..
This also applies to other commodities like soybeans. To say that certain loops will result in all commodities declining is false. There are other factors such as reduced crop in South America and large exports to China which are now driving soybean prices up even though we are in recession.
The world is a complex place. Over simplification sometimes helps understand what is going on, but can not be trusted to explain complex systems. The economy is a very, very complex system and the world economy which is an amalgamation of differing complex systems is exponentially more complex.
Beware of simple answers in complex systems analysis.
Note that compared to the conventional wisdom systems "analysis", the above is more a "complification" than a simplification. The point on the inability to assume that the US productive sector is roughly equivalent to the global productive sector is well taken ... but given that it is a critique of a view that is even more oversimplified, it is at least a step in the right direction.
When bringing it outside the parochial US view, there is also the feedback loop:
(1) Increase price of oil
(2) Increase in US current account deficit
(3) Slowdown in US economic activity
(4) Reduced ability of US to attract capital inflows
(5) Drop in US$ exchange rate
(6) Increase price of oil
And unlike the negative feedback loops from the increase in oil prices, this one is a positive feedback loop, for oil prices within the US, although it suggests that the hammering of the vulnerable US economy will offer respite for the international oil price if viewed in, for instance, a trade weighted basket of Euros and Yen.
And of course, that raises a further feedback loop:
(1) Perceived greater instability of oil prices in US$ compared to € and/or ¥
(2) Greater reliance on €|¥ as international reserve currency by nations with pegged exchange rates
(3) Increase sovereign demand for €|¥, and reduced sovereign demand for US$
(4) Decline in US$ relative to €|¥.
(5) Greater instability of oil prices in US$ compared to €|¥.
Gail's feedback loops have become visible in retrospect, but I didn't see anyone predicting these types of relationships ahead of time. I certainly never envisioned these relationships emerging.
Bruce's loops are, I think, good predictions of what lies ahead. I would have added "US gov and Federal REserve engage in massive 'quantitative easing' (i.e. money-printing) to replace foreign capital flows".
My understanding of Nassim Taleb's Black Swan is that we have an inate propensity to join the dots even when it is inapropriate. Such as making figures out of the random scattering of the stars, for example.
However that is not an excuse that impresses Mr Darwin. We have to peer out of the windscreen no matter how foggy the road ahead.
I suggest that we make the machine slow down, just like the Report to the Club of Rome suggests.
Bruce,
I like your feedback loops. I was kind of thinking of the first one, when I mentioned the level of the dollar. The special place of the US$ seems like it has to go away--reversion to the mean, if nothing else.
Do I have it right that another consequence would be increased mortgage rates (I'm vague on this as any financial issues are very new to me - but something about bond auctions determining fixed mortgage rates??)?
"Beware of simple answers in complex systems analysis."
Oh the wisdom in those words. Simple answers can be very dangerous, or as Albert Camus said of WWII, "but for a few distinctions, a thousand cities were lost."
RC
Beware of simple answers in complex systems analysis.
Interestingly, Stephen Wolfram, author of A New Kind of Science and developer of the recently released alpha of a computational (re)search engine called Wolfram/Alpha says exactly the opposite: Beware thinking that because the thing looks complex that there must be a complex function underlying it, which is exactly opposite to your maxim.
x
You are right--this is really a US centric view.
What I have written needs further refinement to better reflect the world situation, but that was really outside of my first pass at this approach. What readers add is helpful.
Interesting post Gail.
In addition to the absolute price level, the rate of change of prices has a big effect on price evolution.
The shock effect of sudden oil price increases has in the past created swift changes in efficiency behaviour (people consolidate trips etc) which are then subsequently reinforced by structural efficiency (people buy more efficient vehicles).
These shock effects occured in 1973-74, in the early 1980s and in 2008.
However, if prices crawl higher slowly but steadily then oil consumption behaviour and efficiency may not change much.
As the saying goes: A frog placed in boiling water will jump out. A frog placed in cold water that is slowly heated will ultimately be cooked.
In summary, if supply shortages occur suddenly then the subsequent price spike will be followed by a price collapse. If supply shortages occur more gradually then price increases become more sticky.
As oil prices moved higher on average by $1.05/month from $17 to $77 over the 57 months from November 2001 to July 2006, demand grew steadily both in the US and globally. Then prices moved higher by an average of $2.92/month over the following 24 months up to $147 in July 2008. This faster price increase contributed to the consumer shock, change in consumption behaviour, reduction in demand and price collapse.
And yet, there are supposedly serious advocates for serious policies to reduce the severity of climate chaos through policies to establish a fee for fuels for CO2 emissions ... who treat volatility of prices as a bad thing.
Reflecting the real world uncertainty as to what price will be required to meet a given target into the market system is one of the positive things a carbon fee can do ... especially when switching to non-carbon emitting alternatives eliminates the uncertainty.
Buster,
I agree with you. The quick run-up in prices had a significant impact. I think the impact was perhaps just as significant on businesses, who had no time to readjust budgets and plan for the change. Instead, they needed to take ad hoc steps to get the system "righted", even if it meant laying off people or shortening hours on a short-term basis. It may also have affected the amount that companies needed to borrow for undertake new project, and cash flow available for paying back old debt.
Gail, I have this sense that soon the *price* of oil will be less relevant than the actual *availability*. Once there are absolute shortages, price can do what it will, be more oil won't appear, and the physical effects of actual shortage will begin to bite regardless.
I wonder if you have any source of information for absolute demand? I don't know where to start for this question, but I have an idea that the whole global economy has become so dependent on the paradigm of abundant and cheap oil fuels, and an ever-rising production curve, that even the most non-discretionary functions of life will soon be impacted severely by the just-beginning contraction of supply.
Depressions depress demand -- up to a point. But a heavily oil-dependent civilisation can't depress its demand too far before it's beginning to compromise its essential life-support. Have you -- or has anyone -- any clear idea of how little the global production figures can shrink before we enter that death zone? Not much, I intuit. And the now-commencing fall-off will take us there terrifyingly quickly, I suspect.
One thing to look into in this regard is Nitrogen fertilizer. At present, most nitrogen fertilizer is produced using Natural Gas, which tend to track oil price shocks. Indeed, there was a reduction in nitrogen fertilizer use in the US Midwest in last year's growing season, with the predictable impacts on yields and, for wheat in particular, protein levels as well.
Protein levels in cereal grains may not be seen as a big issue in the US at present, but given that we are producing and, even more, consuming an ecological unsustainable quantity of animal protein per capita, it may become one over the decade or two ahead. It is already a serious issue in places like Egypt, where a substantial quantity of protein consumed by the a large share of the population is wheat protein complemented by legumes.
...consuming an ecological unsustainable quantity of animal protein per capita
I disagree. It is not the consumption of animal protein that is the problem, it it current population levels. Given a planet with 7+ billion humans beings (+net 70 million more added each year), the current rate of consumption of practically *every* natural resource is "ecological unsustainable". Given a planet of, say, 1 billion (or even better --less), not so much.
I have a problem with advocating we all switch to a vegan-only diet, given the negative health effects of a high-carbohydrate diet that we are already seeing throughout the industrialised world --including obesity and adult-onset diabetes. Like it or not, for the vast majority of the existence of the human species, we have been primarily hunter-gatherers who ate, among other things, animals. Granted, vegan diet does not = high fructose corn syrup, but eliminating *all* animal protein from one's diet does not sound like a recipe for overall good health to me.
Hi Harm,
I support your disagreement. I cringe every time I hear someone advocate that we can support a larger human population by eating less animal - more veggie diet. The last thing this planet needs is a larger human population. Feeding humans is not the first priority for sustaining the biosphere of the planet - upon which humans are totally dependant.
Also, regarding human health (again I agree with your comments) there is a great book titled "Good Calories, Bad Calories" that provides an excellent analysis of how we got to this FDA stance regarding fat. This is not a fad diet book, it is more an analysis of the scientific and political process for how the US came to advocate certain diet recommendations.
I think the discussion is not about increasing population from current levels. Instead, it is about reducing the amount of starvation in the years ahead of people who are here in the world right now.
I don't know that people are talking about vegan diets. There is certainly a large amount of cutting back on meat that could be done. The could also be a lot of cutting back on processed carbohydrates as well.
Here's a thought for doomer meat eaters such as HARM: if you think vegan diets are unhealthy, and you want to decrease the planet's population, why not advocate we all adopt a vegan diet?
Seriously, look up the vegan diet, and articles on whether vegans and vegetarians are healthier or sicker than the average American meat eater, and on the role of "refined carbs" in a vegan diet, and draw your own conclusions. If you really believe we will all sicken and die if we stop eating meat, then you just need more facts and less hearsay.
After all, in a low energy society, where the present cornucopia of medications and bypass surgery disappears, while Africa experiences massive starvation, we will need to know the truth about what diet is best.
I personally eat very little meat. I do eat some fish and a small amount of dairy products. This combination has worked well for me, and would use a lot less resources than the current American diet.
@Paranoid,
I don't think *all* vegan diets are necessarily "unhealthy", though depending upon specifically what you eat, "your mileage may vary". I also think you are offering up a false dichotomy of choice here, implying that our dietary choices are roughly split between:
(a) typical American diet of mostly highly-refined carbs (crap) + red meat
or...
(b) extreme no-animal-protein-ever vegan diet
Are these really our only two choices? How about an Atkins or South Beach/Meditteranean diet? Or any diet that emphasizes fresh, whole foods over HFCS and heavily processed junk? That approach has worked out rather well for me.
Hi Gail,
I guess it's easy to get a bit off-topic, but I think a huge problem is growing population. Back in the 70s, when I read the "poulation bomb", I was convinced that the world population would never get anywhere near today's level. I just did not appreciate the level of misery that people would tolerate just to breed more humans. Your concern about potential starvation is certainly valid, but the question is how many people will be starving - today's 6.8 billion, tomorrow's 8 billion? Or would it not be more sensible to advocate a massive family planning program to reduce the number of people in the first place? The Bush administration is an example of totally misguided policy - the general refusal to support family planning programs that conflicted somehow with faith based thinking. Harm (if I may speak for him) and I are just trying to point out that an intelligent approach to human population reduction could be one of the best ways to mitigate many "peak" problems. I readily admit that I don't know if it is too late - but certainly too late if we don't even recognize the population issue.
No doubt in my mind that processed carbohydrates is another example of a great delusion we harbor - 80% of my supermarket is devoted to this stuff and 90% of the customers don't think this is a problem.
@bicycle dave,
You may indeed speak for me --I completely agree :-).
I doubt such a thing exists as "absolute demand" for oil. It is not a necessity in the same way as food is. Nitrogen is a bad example. Even given all efficiencies, we need a certain amount of nitrogen to produce enough caloires to feed everyone. But do I need an SUV rather than a motor assisted bike? Do I need the motor at all? Do we need 5-day work weeks?
There is, no doubt, a base level of energy need to do basic things like food production, but that level is probably much lower than anyting we are looking at soon.
Andrew, no doubt the human population of the world could survive on food produced with a lot less energy. However that is only part of the problem. When the energy supply stopped growing in 2005 it was only a matter of time before employment stopped growing.
A growing energy supply is needed in order for us to have near full employment. As the energy supply drops, growth drops, employment drops. It simply does not matter how many calories it takes to support the world's population, if they cannot afford to buy those calories they will starve.
Ron P.
I wish somebody else but me would take up the job of endlessly emphasizing the obvious- that much- very much- of what people in countries like the US do is WORTHLESS AND WORSE and should not be done at all, regardless of how much energy there is available. The contents of any store, any catalog, any example of daily activity, shows this over and over for anyone to see who will look, and it's criminal that we keep doing this stupid stuff, wasting our one and only planet forever.
Energy shortage hell! The real shortage is ethics, brains and foresight.
I think it is difficult for us to understand how the financial system (including the credit system) is tied in with everything else.
If there are shortages, they may show up through the financial system, in places we don't expect. It seems like the way peak oil and limits to growth may ultimately show up is through products not being available to most of the population, because they are unaffordable.
What is the "death zone"? Could you, please, define it. And could you tell us how we, too, can intuit this. And how is an alleged "fall-off" taking us to the death zone? And how quick is quick? Just yesterday, for example, on another post on this site it was suggested that we could slowly decline for the next 100 years until we reached a sustainable, and much lower, level of existence, while other people have suggested 2017 as the "date" of collapse. Is collapse the same as death zone?
Rhisiart,
It seems like underlying demand very much depends on built infrastructure. There is a certain amount of contraction that can be done within a particular level of infrastructure (car pooling, moving together into more conveniently located houses), but, after a point, the system starts breaking down. In general, manufacturing can theoretically temporarily disappear, but this leads to huge problems as well--people without jobs, decline in asset values because people's incomes are lower reducing demand, and more defaults on debt.
I think different systems start breaking down at different times. The debt repayment system seems to me to be the most vulnerable, long before there are physical shortages of oil. I worry that the breakdown of the debt repayment system will spiral into a more general breakdown of the international financial system except for trade between trusted partners, and trade on more of a barter basis. If this should happen, there could be a very sudden drop in imports, to below the amount that is needed for essential life support.
I agree in general this is probably whats going to take us out.
However I'd suggest the fact that interest rates being kept artificially low in and effort to slow the default rate on existing debt is causing as much harm as good.
I suspect that the government will soon have little choice but to allow interest rates to rise to reflect the real risk in lending. Also of course same for the housing market its being kept artificially buoyed in the US with a combination of FHA loans and a 8000 dollar cash back scheme that effectively gives you something close to the zero down subprime loan.
Once these artificial constraints are finally forced off the financial system will begin to correct and although defaults will increase structurally it will be sounder.
I don't think the governments can prevent this from happing and its simply to basic a force to be stopped.
However this will only work to delay the end. Correcting the financial system does nothing because the intrinsic problem is simple most of the debt in the world is tied into infrastructure spending for Real Estate and we simply have to much of it. And commodity prices are increasing.
So even as the system finally starts to stabilize on the financial side the intrinsic growth required for fiat monetary systems is failing.
As with the subprime fiasco its another case of closing the barn doors after the horse has bolted.
I'm honestly not really sure what happens then tough lending standards mean nothing if 20% of the houses in town are empty and the value of the homes are then effectively zero.
I'd suggest the system will then be basically dysfunctional and monetary policy is almost irrelevant. I think your right in a sense we will move to more of a barter system so by the time they conceded defeat and institute sound fiscal policies the system would have started giving up on using fiat currencies.
Note that bills of lading serve as the barter equivalent of currency. Assuming we have computer networks I'd suggest that ad hoc currencies based on something like a futures market are possible. Using computers to create a functional barter system is a bit interesting but doable :)
Obviously such a move is really more about tax evasion and or avoiding hyperinflation.
But no intrinsic reason esp with computers that you can't reject traditional monetary systems and create a elegant easy to use barter network.
I'm tempted to build one but the IRS would come down on it like no tomorrow.
I think we've just hit the first stair step down of collapse. High oil prices have caused an economic collapse as GDP shrinks to a level that drops oil lower. Supplies will shrink to catch up to lower demand, prices will spike (maybe higher next time?), economic collapse to a lower GDP, higher unemployment, etc. In 20 years, oil may very well be $50 a barrel but we'll be using 50% of our current amount because 50% of the population is unemployed, etc.
I'm sorry, but total oil use (the physical measure of demand) does not appear to have shrunken by much at all, despite global economic contraction. Am I missing something here?
Okay, how about "oversupply will shrink to catch up with flat demand"?
At least for this stairstep down. Who knows about the next one.
Above ground storage both of crude and products - not all the barrels being produced/demanded are actually being consumed.
and
Untrustworthy statistics.
The shipping prices should tell you something about whether demand is down.
Because oil is such inconvenient stuff to store, supply always equals demand within a tiny margin*, so this line is a trueism anyway. Consumption has fallen about 3.5% from the March'08 peak.
G.
* recently estimated by Rune Likvern to be about 2 Bbbl, or about 3 weeks supply.
Agreed. Inflation and deflationary cycles seem likely to me.
However, what will these newly laid-off people do? Will they die? Will NONE of them ever find ANY work ever again? Seems doubtful.
Seems like they might move to high-density slums or something. And get bikes. And engage in the underground economy for as long as they have to. They may work together to form communities. They may be put to work for a scraping-by wage by the government to build wind turbines and a new grid and houses they can afford to heat/cool or to pour concrete for new nuke plants. They will do a number of things.
What people forget is that the beginning of an energy transition pretty much must look like the beginning of collapse, b/c they are the same thing initially. People won't change until they have to. Few are going to give up their SUV and McMansion until they are forced. Proving that Peak Oil caused the economic meltdown (I believe it directly did) is not the same thing as proving imminent, irreversible collapse. Both sceneraios, THE END and CHANGE will likely look exaclty the same at the get go.
Gail, thanks for another great analysis. However as you have explained in previous threads what really did happen.
Numbers 1 and 2 did not happen. More oil was not produced and no meaningful substitutes came on the market. Number 3 did not happen because commodity prices were quite high, like oil, as the crisis was developing. Number 5 did not happen because interest rates were quite low and were lowered considerably last year as the crisis was developing. I am not sure about Number 6 as some of those things were definitely happening but commodity prices were quite high, not low, as the crisis was developing.
That leaves number 3 as the culprit. But no, that is not correct either because you say: Lower demand for commodities of all types. Lower prices for commodities of all types. That simply did not happen. Other commodity prices peaked at almost exactly the same time as oil prices peaked.
Historical Commodity Prices
There were actually two crashes. Oil and all other commodity prices crashed in July of 2008. Though the stock marked peaked in 2007 the banks, along with the rest of the economy, crashed in September of 2008 along with the largest stock market drop in years. And during the whole scenario, interest rates, that is the cost of money, remained at historical lows.
Edit: Make that three crashes. The Housing Bubble burst in early 2006.
Here are graphs of inflation-adjusted, historical home prices.
This thing simply needs to be rethought.
Ron P.
Ron, that's just what I was thinking too, but you described it with far more eloquence than what I would have done.
A core assumption in Gail's article is that the oil price spike caused the recent crash(es). I don't think this can be taken as a given. The frenetic explosion in easy credit & mass leveraging of debt well beyond an ability to service the debt by both consumers and large companies was already hitting its limits and was well & truly due for an unwind. Sure, the oil spike could have expedited the economic meltdown, but the real problem was and is excessive debt, and the crash would have occurred if oil hadn't spiked.
Unfortunately this makes it hard for me to accept any of the feedback loops in the article. In theory they look ok, but imho its wrong to say that oil prices caused the current recession.
Commuter, it was not my intention to imply that the very high price of oil in 2008 did not cause the current recession. I do not believe it was the entire cause but it certainly contributed to it. And it will indeed be the cause of the non-recovery. The energy supply must grow if the economy is to grow. And in a debt based economy such as ours, if the economy does not grow it will collapse. And collapse is exactly what we are experiencing right now.
Ron P.
Oil prices have been rising over a period of time, exerting squeezes on the economy. Different things happen at different times. Why is that hard to understand? Subprime debt was among the most vulnerable, and got squeezed first. Some of the other changes came later, affecting more and more debt markets. Why is it a problem to have changes at different times?
You say "Number 3 did not happen, because commodity prices, like oil, were quite high as the crisis was developing". I am talking about a long period, roughly 2003 to 2008. Commodity prices were rising during that period. You must be thinking about a much shorter recent period.
Regarding Number 5, did you read Steve from Virginia's article. We are talking about the time period leading up to the housing crash, 2003 to 2006, and the minutes of the Federal Reserve Open Market Committee are very clear that the interest rates were being raised in response to rises in oil prices. The damage credit system was already done by the time of the sub-prime crash. We are living with the continuing
We live in a world where actual resources extracted from the earth have not been growing rapidly for several years now--since around 2000. Debt was growing a lot more rapidly, thanks to very low interest rates and the availability of "structured securities", put in place to give the illusion of growth. The combination was a system that was ripe for collapse. While one can argue that the system would have collapsed anyhow, the whole reason it was ripe for collapse was because the expansion of debt was simulating growth, when the underlying resources were growing very slowly. One can say that the collapse is not the fault of the underlying resources not growing rapidly; instead, it is the fault of politicians and economists thought they could create the illusion of a growing economy, even when resources were not growing. Aren't we splitting hairs?
"In 20 years, oil may very well be $50 a barrel but we'll be using 50% of our current amount because 50% of the population is unemployed, etc."
And also the average wage may be a few dollars an hour, so $50 oil will be the same as $147 oil last year.
Instead of putting my oil royalty cheques in the bank, I have begun cashing them and buying physical gold for my safe-deposit box. I will be in my 70s twenty years from now and my oil wells will probably be dry, but the gold will still be worth something. Remember that twenty years ago, General Motors was a blue-chip stock for widows and orphans.
You might want to think long and hard about banks and deposit boxes,although I am sure that for the time being your gold is reasonably safe there.
"You might want to think long and hard about banks and deposit boxes,although I am sure that for the time being your gold is reasonably safe there."
Different situation in Canada. My day-to-day chequing and savings accounts are in a credit union and the Alberta Treasury Branch (deposits 100% guaranteed). Canada never seized gold or closed banks as the USA did during the Great Depression, so safe-deposit boxes are secure.
No Canadian banks have failed since 1923. Unlike the American banking system, there are only a few dozen Canadian banks, viz, the Big Five, various trust companies, and a few smaller banks. There are hundreds of credit unions but they are all part of a national federation. The Big Five are Royal Bank of Canada, Toronto Dominion, Bank of Montreal, Bank of Nova Scotia, and National Bank of Canada. ATB is part of the Alberta provincial government, not a chartered bank, and is probably unique in the world in that it cannot fail unless the provincial government itself fails. Fortunately there is no danger of Alberta becoming another California; the oil didn't go away just because Wall Street banksters were caught out.
Precisely why you can't even be sure whether or not gold will still have value. Based on past experience you might be willing to make that bet and you may be right. You might also end up with an awful lot of very heavy shiny yellow paper weights. Not saying that that will happen just saying that times they are a changing. What may seem to be an absolutely sure thing may turn out not to be.
Maybe skills, hand tools or the means and access to fresh water and food, that should still be worth something.
Good Luck!
"Maybe skills, hand tools or the means and access to fresh water and food, that should still be worth something."
True, and I agree with you, but 5,000 years of human history has demonstrated that gold will always be a useful commodity.
Check back with me twenty years from now and I'll let you know how it turned out!
Recent human history extends back at least 200,000 years, so 5,000 years is a mere fad.
Let's see, gold has had value for over 5,000 years. It takes an enormous amount of fossil-fuel energy to produce gold (crushing tons of rock, for instance), and that's never going to be cheap or get cheaper. Silver is even more energy intensive. I think I'll stick with my precious metals, thanks.
...buying physical gold for my safe-deposit box.
The contents of SDBs are not insured, so if your bank burns down or gets looted, there goes the gold. Same for if the government devalues gold or confiscates it.
Then again, when you come to me with your gold in exchange for a can of beans, do you think I'm going to make the exchange?
Please note that canny investor John Paulson, who made a mint out of the Global Financial Collapse, has just recently sunk billions into gold. Maybe he knows something you don't?
I believe that the best indicator of future oil prices is still the value of the US dollar, although there should be an interesting case of the future inflated dollar versus falling global demand.
Eric T. @ http://www.jazdoilandgas.com
Welcome to economics, and the reason why we card carrying economists are legally entitled to use the phrase, "On the other hand...".
A big part of our current mess is market psychology, which is, in turn, heavily influenced by timing and the magnitude of changes. Right now, a lot of consumers are just plain shell shocked. Housing, the stock market (and therefore their 401Ks), banking, the price of gasoline and home heating fuel, and the auto sector have all delivered pretty painful shocks to the consumer in the last year. Many people are still feeling a major reduction in their perceived personal wealth (house value plus savings, more or less), and are very hesitant to spend on what they consider to be luxuries or non-essentials. Add to that the uncertainty about new legislation to curtail CO2 emissions and all the competing plans and proposals (like Pickens') they hear about to get us off oil or achieve some other large goal, and it's a wonder they're not all hiding under their bed.
In terms of oil this will likely keep prices from taking off and help us tread water for a while on a production plateau (world wide production will be less than capacity for another year, maybe longer). Beyond that, it gets gratuitously interesting.
Gail -- It’s probably obvious to most by now that PO doesn’t exist in a vacuum. Energy is just one component in the economic engine. Just like an ICE that can function even when the oil pressure is low, the radiator gets a little hot, the transmission slips a little, etc. But it still gets us where were going. Any one critical component failing puts us out of action. But just like with the economy there are feedback loops. Degrade one portion of the system and you degrade (or even produce failure) of another segment. Then develops the arguments: did the oil price spike cause the economic downturn? Would the over leveraged credit market still have failed eventually regardless of energy costs? Will a decline in oil production (and a subsequent price spike) kill economic recovery just as it begins to turn around?
This week I hit my one year anniversary mark at TOD. The greatest benefit of this association has not been a better understanding of the technical issues regarding PO. Understood those decades ago. But I’ve gained greatly from the thoughtful comments of so many here. The technical side of PO is actually child’s play. It's the interaction of the many components of the puzzle that is of primary interest. There is no stand alone solution to PO just as alternatives are not a solution in and of themselves. Regardless of their technical merits they are of no value without being applied on a broad scale. That requires amendments to society’s attitudes as well as a viable capital source system. Unconventional NG isn’t a solution to energy stability in the face of price volatility which produces rapid expansion followed by nearly complete collapse.
We can still enjoy debating amongst ourselves which car batteries make more sense or how much oil might be found in Deep Water Brazil. But I suspect many here also now see that bigger picture. We can speculate all we want about Ghawar’s future decline rate or the potential expansion of nuclear power in the US. But taken individually those factors don’t predict the ultimate future. As I now view the future it’s the interplay between the political system and the global economy that will determine our progress (or lack there of) towards greater stability or chaos. Looking at where our society is today I think it matters little when PO has or will occur. Nor does it matter whether the financial system degrades further or not. What is important is the reaction (or lack of) to these changes that will cast our fate. Just as with some medical problems, the cure might kill you quicker then the disease.
Great post, and also, many thanks to Gail for her many fine contributions.
Personally, I think the collapse in oil prices over the last year is plainly caused by a financial panic - an old fashioned type caused by a lack of credit panic similar to that of the Panic of 1873.
It's unlikley to occur again, although it's also remotely possible an even worse total shut down of US infrastructure caused by PO, pandemic, etc., could make things even worse and cause deflation. Barring that, monetary trends and oil market fundementals determine the price of oil.
I have great difficult believing that the relative price of energy will not rise in price. The comparison to the late 1800s above is not entirely valid, being that since most commodity prices fell in that time frame, the measurement of the absolute level of whale oil prices doesn't give us a clear idea of its relative cost.
The relative cost of energy is going much higher over the long term, as shortages develop. With the the Fed now committed to a multi-trillion $ expansion of its monetary base, the price of all things is also set to rise sharply.
In two years we may look back with disbelief that oil even sold for under $50 in 2009.
Panic ... and hedge funds being called on margin loans that they had invested in oil futures. It was the "credit crunch" acting like a magnet pulling cash out of oil and other commodities in order to service debt. Once that got underway it sparked the typical rush for the exits. The selling was not caused by supply/demand fundamentals such as a wall of oil hitting the markets - it was simply that a lot of oil futures money was required elsewhere.
Rockman, I've not posted this for a while and it's in need of an update (last edited sometime early 2008?? -Most of its content was gleaned from TOD and readings/learnings around the PO subject. Thx all!)
Anyway, here's my 'holistic' 2 decade crystal ball view (which some may think is a tad pessimistic and some will probably think doesn't go far enough down the slippery slope!)
-"US Stock Market Collapses losing 50% of its value -greatest loss of wealth in history" (circa 2012 -Oooops 4 years late!)
Nick.
Nick,
I would suggest that you need to advance "renewable build-out comes on line ..." by 10years( its coming on line now)and change to ...and has a major effect.
Also rolling blackouts could be modified to "wide-spread blackouts become more frequent( from once a decade to yearly).
Some other internal inconsistencies, if uranium price explodes that would imply the massive build out of nuclear, hence no electricity crisis. A lot of new uranium mines are coming on stream about now, and very few new reactors are being built, that could change but the 10 year building delay allows uranium expansion( eg Olympic dam )
Hi Neil1947,
in general the start of the sentance indicates the start date -so in the case of renewables I put that around 2018 -i.e. a 10 year ramp from where we are now. Some European Nations are trying to achieve 20% renewable penetration by 2020 -we shall have to wait and see if this can be achieved...
The reason it has 'very small impact is that Peak Oil (event circa 2012ish) will be primarily a liquid fuels crisis and it will take aa long time for electrical solutions to have an impact here even when they come online. However I also see a Gas crisis shortly after (2013-14) and renewables can help here.
The Uranium comment is valid as I do foresee a massive buildout of nuclear. The Russian 'nuke supplyt deal' will come to an end in or around 2012 and new supply will have to come from mines not nuclear warhead decommisioning and there is likely a big shortfall even without PO. If we hit a PO event then Nukes will be seen as 'an answer' (ref. 1970s) and the anticipation of this along with the Russian deal-end could make a Uranium spike occur. Most Uranium is used in the charging stage.
Actually one element I am really keen on right now is Molybdenum. I can foresee this metal being in verry high demand int he next couple of decades and I am loading my portfolio accordingly. In fact its been my best investment so far this year. (E.g. Moly Mines, Thompson Creek) and the REEs are doing well to e.g. Lynas...
Regards, Nick.
Nick,
A lot of Mo is used for oil pipe, possibly less of that is going to be used in future, or old pipe recycled, it's hard to know if OPEC will spend as much as US on squeezing out oil from smaller fields, and if it will occur over a longer time. A lot of oil pipelines in US are going to become surplus scrap.
Pretty good calls noutram. I'm sure a number of folks cast doubt on your sanity way back when. But I also suspect a good number of TPTB knew these potential risks were out there but decided it was a safe bet as long as it gave them cover for a while. And if they lost the bet they could always blame it on "Them".
Bravo!Fed by cheap credit,aimed at keeping this expansion up,so no one would notice the lack of real growth.In my estimation,nobody will ever use fewer words to better effect in describing the failure of our political and financial leadership in discussing the history of the crash of 'o8 than you have done in this short article.
The hundred trillion dollar question is "Is there any realistic hope of preventing the same thing from happening again?" down the road. This is assuming of course that we manage a soft landing this time,which is not a given.
I have never in my life asked any one for an autograph, but I would love to have yours on a hard copy!
OLDFARMERMAC - you hit the nail on the head. Lack of real growth. What growth has been real has also been at a greater and greater cost. Besides credit the lack of real growth has been covered by "efficiency". I read the other day that we have many less staffed beds per person in our hospitals than we did in our last flu pandemic in 1968. http://scienceblogs.com/effectmeasure/2009/05/swine_flu_breaking_the_acu... It was so efficient in hospitals and everywhere to cut out all slack in the system. What looked like growth was just cutting costs, but has left us vulnerable, not only in our hospitals but also in our industry and utilities. A fall pandemic will point that out. Perhaps even precipitate the beginning of Richard Duncan's projected grid collapse due to workers being out sick and no trained backup to cover for them.
Whatever, the system is fragile. A reading of Joseph Tainter would indicate that this is how it goes at the end of a civilization. Details may differ but when the complexity demands more energy than the system can provide something gives.....
Have to dissent on this one, Gail.
Of course there can and will be fluctuations up and down, but overall and longer term the price of oil can only go up. That's because the cost of producing it can only go up. It's price cannot long stay below the cost. That's for starters.
Oil's strategic importance in the wind down of the industrial era will only increase, and will be and is a matter of intense competition on every level. I believe that even the momentariy low price is at least partly ascribable to energy wars -- Russia I believe rightly suspects this.
Given sufficient economic volatility, the price can on occasion crash below the price of production, but any such price drops will be transitory, and the "normal bottom" will be an upward trending cost of production.
At the top, to the extent that oil price shocks drive the replacement of oil consumption technologies, it will require progressively higher price shocks to drive out the "higher value" uses that did not respond to the prior price shock. So there will be an upward trend to the top as well.
So the likely trendline is likely to more closely resemble the Whalebone example than the Whale-oil example, where Whale-oil had the less desirable but increasingly available alternative of Kerosine (leading to increasing quantities of gasoline as a by-product unsuitable for use for lighting, leading to the early advantage for ICE's burning the by-product).
Oil prices may not follow similar post peak price patterns of either whale-oil or whalebone (baleen). Whale-oil for lighting was quickly replaced by petroleum. Whalebone (used to support corsets and buggywhips) was not as "essential" as whale-oil and was easily replaced by fashion (no more corsetry) or wood (buggywhips).
Petroleum for transport has no viable large scale alternatives and is essential to our current lifystyle.
Efficiency is a major alternative - 4 people in a car rather than just one quadruples the amount of 'transport for the buck'...
Then there are major improvements on actual mpg per car and conversions to gas or electric charged by nukes or wind, etc...
OK, I understand all the usual caveats like vehicle replacement timescales and resources constraints for these replacement strategies so perhaps society will simply just suffer the consequences of demand destruction...
Oil heading through $60?
Nick.
Not for global capitalism and not for the military machine.
buster,
As well as efficiency gains( as pointed out by Nick), we are talking about oil production declining by 5%/year perhaps even 10%/year at some time in the future. A 10% decline would take 7 years to halve oil production, a 5% decline 14 years.
I see 5 responses ALL of which TOGETHER can help to reduce oil consumption by more than 50% in 7years;(1)bio-fuels increasing from 5% to 15% (2)fuel economy increasing from 25mpg to 50 mpg on new ICE vehicles (3) half of new vehicles are electric or use electricity for 90% of VMT (4) 10% of existing vehicles are converted to CNG (5) gasoline rationing and/or price rises reduce VMT by 20%.
In 7 years half the VMT will be from vehicles produced after 2010(5million boe/day at today's consumption would be only 1.25M barrels). CNG conversions would save 1M barrels, and an increase in bio-fuels provide another 1M barrels. Reducing VMT by 20%( mainly old 25 mpg vehicles) another 2million barrels, so consumption could be just 3.25Million barrels( one third of 2008 consumption). Other uses, home heating, industry, airline travel would also have to make reductions.
Let's say those solutions work (putting aside criticisms of each for now), and the production decline scenario plays out as you describe. That buys us 7 or 14 years. What happens if production is still declining?
We can and should try to get ahead of the decline curve by becoming more efficient etc. But ultimately that only buys us a little time and we quickly hit upon limits to those solutions.
The biggest unspoken (at least outside of TOD) truth about oil is that there are currently no economically viable and scalable long term alternatives to oil at any price. There may be in the future - but not at the moment.
I am not trying to be negative - because getting ahead of a decline curve and buying time is very helpful in avoiding a panic which means improved decision making about solutions. But in addition to having and implementing a game plan to get ahead of the decline curve, we need to have a clear vision of what the end game should be. It has to be an end game everyone can buy into (not Doomerish - there aren't enough hills for even Doomers to hide in) otherwise it cannot succeed. The end game has to be based on the fact that there are currently no economically viable and scalable long term alternatives to oil at any price. Does that mean we need to change the rules of how we live and especially our transportation? Does that mean that ultimately we all live in ultra-dense cities or in standalone self-sufficient communities? Does that mean that meats and high energy intensity foods are banned/restricted? Does that mean a lane on every highway is converted to become a tram line?
Getting back to Gail's original post about the evolution of oil prices, isn't it surprising that, with a few exceptions, oil companies are not all over the energy solution bandwagon rather than denying the issue/abstaining from the discussion. If oil prices go back above $150/barrel and stay there then there is a huge risk that oil companies (even in the US) will either be nationalized or suffer crippling windfall taxes - neither of which anyone should be in favor of because (as you know from the lack of E&P spending in Russia, for example) that will only compound an already difficult situation.
If oil companies were to warn people now of the high likelihood of sustained $150+ oil within a few years then they could raise awareness of our energy resource situation (which would legitimize planning) while also managing price expectations and ultimately avoid nasty shocking outcomes.
Buster,
"That buys us 7 or 14 years. What happens if production is still declining?"
Fair question, production will definitely still be declining after 7-14 years, but the first 7-14 year period after peak oil is the critical time. This is when we need to increase EV production. Obama's reported 42mpg by 2016 is a good step towards replacing low mpg vehicles, and time and price will help to get the older 15-20mpg vehicles off the roads.
Let's say by 2018 we have dropped gasoline use to 3.25M boe/day. Higher prices will have less effect on those driving EV and PHEV's, and squeeze out the older gas guzzlers. Each year another 10-15 M EV's will be available now representing 15% of the 100M ICE's(remaining), rather than 7%( of the 220M in 2009). Some of the CNG vehicles will also be retired reducing pressure on NG. By then all oil heating and NG heating should be converted to electric heat pumps, keeping NG for peak electricity demand and for CNG vehicles.
Renewables and nuclear in North America now account for 39% of electricity, wind power is adding another 1% every two years, and doubling every 2 years so by 2018 should have another 12%(no growth ie adding same as 2008 per year) or up to 30% of electricity(some further growth in capacity additions per year) by 2018(total 68% renewable and nuclear). Solar is increasing rapidly but probably won't make a major contribution until 2014-2016. That's why I am saying significant additions of renewable energy are occurring now. If nuclear is started again by 2010 could see a lot of plants come on line by 2020.
"no economically viable and scalable long term alternatives to oil at any price."
this only applies to air travel, rail and road can be replaced by electric battery and/or electric overhead( trains trams), sea transport by direct injection coal/water(DICE) using existing diesel engines or gas turbines and diesel/coal for marine steam turbines. I think marine transport uses 3% of oil so these measures should reduce that to <1%. Is there a reason why these would not work or could not be introduced over 14-28 years?
As far as uranium fuel supplies the post yesterday on Lead/Bismuth breeders would suggest we have the technology now for breeders. The Olympic Dam expansion is planned for 2015(30% of worlds proven reserves), other known deposits can be developed.
Hi Buster and all;
Thanks Gail for stimulating another fascinating discussion, and all who have contributed to this thread.
Buster wrote: "The end game has to be based on the fact that there are currently no economically viable and scalable long term alternatives to oil at any price. Does that mean we need to change the rules of how we live and especially our transportation? Does that mean that ultimately we all live in ultra-dense cities or in standalone self-sufficient communities? Does that mean that meats and high energy intensity foods are banned/restricted? Does that mean a lane on every highway is converted to become a tram line?"
I have previously mentioned what I am about to say in another related post. But I now I am more passionate about it. There needs to be a global state of emergency decreed. Instead of the G20 sitting around working out how they can save their arses by perpetuating the growth illusion, they should be meeting with key representatives from all nations and agreeing on an end game. From there it is a matter of planning and making the journey there.
I have an ecological management history, and I know that many of you are accutely aware that we are way out in overshoot. So, who do we let go? If you want to find a truly confronting unspoken question, this is the ball tearer.
Ecological realism must tell us that all 6.8 billion cannot be saved. Who do we let go? Africa? South Asia? This will be the toughest question that humanity has ever had to confront so far in it's journey. And a lot of the people that must be let go didn't directly contribute to the formation of our energy/economic paradigm. For many, life is a bitch and then your dead.
As rightly pointed out in this thread, the oil companies (and the governments) are not going to provide information, let alone a way forward. So TODer's, I think that this is going to have to happen from the grass roots. So those of us who are awake, and active peaceful warriors, it is time for us debate and agree on an 'End Game' and do our best to enact it. There is a wealth of knowledge and wisdom on this, and other, sites. Knowledge and wisdom without action is like sitting out the back on a surfboard and letting the best wave of the day go by-unforgivable.
I have had a painful three weeks of despondency. This, and Nate's last Campfire have rekindled the fire. Thanks, and the power to you all.
I very much agree with you regarding needing a planned end point. Buying a bit of time with increased efficiency is not going to do a whole lot, unless we have a clear plan for where we are going--and it is hard to come up with a plan we could really implement. (See my advice to Pres. Obama). Even adding a lot of electricity doesn't necessarily get us anywhere, because of the difficulty in converting our oil infrastructure to electricity infrastructure, and the difficulty on maintaining the new electricity infrastructure.
Oil companies, because they are publicly traded companies, are in a particularly difficult situation. If it is perceived that the duty of management is to increase earnings in the future, they can hardly let it be known that they are likely to be faced with inadequate oil supply in the future. Also, as you mentioned, if prices were to rise too high, they would likely be taken over by the government, or the profits taxed away. Some of the oil companies have talked about the problem (Chevron and TOTAL come to mind), but mostly they haven't.
When it comes to talking about the problem, it seems to me that it should be governmental agencies taking the lead role. They have buried the problem, and make it difficult for oil companies who do talk about the problem to be believed. I am sure that Chevron must have paid a lot of money for the peak oil ads it took out a couple of years ago, but without others talking about the subject, it was hard to get the message across.
The American Petroleum Institute is paid by the industry to perform specific services on its behalf. It isn't really in a position to decide what to say (or not say) about peak oil. I remember when the National Petroleum Council (NPC) came out with its report called Facing Hard Truths about Energy Supply a couple of years ago. API hosted a conference phone call about the report. But when I asked about whether the position of API was the same as that of NPC, I was told that even though there is a great deal of overlap in the companies between the two groups, API had not been authorized to take a similar stance, so needed to be silent on the matter.
Gail,
Buying a bit of time with increased efficiency is not going to do a whole lot, unless we have a clear plan for where we are going--and it is hard to come up with a plan we could really implement.
It seems the Obama administration is doing a good job of implementing some sort of a plan: increased fuel efficiency to 42 mpg by 2016, 1Million PHEV's by 2015, improve the electric grid, encourage additional renewable energy, expand national rail net work, allow EPA to regulate CO2 emissions.
Short of taking over the largest automobile company and making them produce fuel efficient ICE and EV vehicles what else could he do in 120 days; Oops! he seems to have done that also.
All of these things just build the platform out a little further, and we still have to jump off, assuming we can really afford the infrastructure. I don't see that they are really a long-range plan.
As someone working within the oil industry I always take time to help educate people willing to listen and learn. Many of my fellow industry colleagues also do this. Recently I even started blogging my thoughts and my analysis shows, to the surprise of no readers here I'm sure, that oil prices will inevitably rise again. I am not aware of any secret hidden agenda in the oil industry. On the other hand I am frequently challenged even by friends and family about various energy issues.
Where I perhaps differ is that I foresee no peak oil crisis, but rather the economics of supply and demand will foster the development of more expensive sources of oil at least for the next two or three decades. Herein lies the reason why oil companies are not 'all over the energy solution bandwagon'. An oil company exists to make money and there is plenty of money still to be made leveraging off their expertise in oil. Simple really.
As for trying to get ahead of the decline curve and how you might encourage energy conservation? Idealism is nice, legislation is hit and miss, but economics will always work eventually. By way of example I am often accused by well-intentioned people of 'doing my part for the environment' because I ride a bicycle to and from work. I take great delight in bursting their bubble. #1 reason is that it is much cheaper than driving or even taking public transport. #2 reason is that it is faster than aforementioned lazy person solutions (admittedly does not necessarily apply everywhere). #3 is that it is good training (I'm an active person if you hadn't guessed). At the end of the day I'm frugal and always have been. Sadly most people are far more lethargic in their response to economic stimuli and if given the opportunity will happily live beyond their means today without giving a second thought to the consequences tomorrow. However I can confidently predict that there is a price at which even the most stubborn people will start to sit up and take notice. You only need to look back to the oil shocks of the 1970s to see that there really were deep changes made to how people use oil as a result.
As to what that price might be, well I doubt prices will stay above US$150/bbl for sustained periods of time in the near future without experiencing demand destruction. Comparison to historical demand destruction from the 1970s suggests that oil demand destruction should start to manifest itself around US$95/bbl (in today's money). Personally I think we started to see some of that when oil prices broke through US$100/bbl in 2008, but of course it's difficult to be 100% sure because of other recessionary influences on demand.
I think enough evidence has been presented to show that higher oil prices played a role in helping prick the housing bubble as more households where forced to conserve cash and became reluctant to spend ever more of their income on housing and as maxed out mortgage owners where pushed to negative cash flow by higher commodity prices in general.
However the tango between oil and debt is far from over and in fact we are just at the very beginning. I think that the relationship will become clearer and more direct overtime.
Now for the most part the ability of the consumer to expand debt much less service it has declined dramatically with credit card default rising at a furious pace and foreclosure reaching all time highs.
If oil prices do indeed rebound one can expect a very nasty cycle to start.
On the global scale rising oil prices will cause more dollars to head overseas either as purchases at the consumer level or as currency conversion. This outflow of dollars which we have printed plenty of over the last few months will finally put all the bank aid into circulation. Not of course as intended. I contend that this will serve on a global scale to weaken the dollar part of the petro dollar as the supply of dollars is infinite but oil is finite. So oil prices start increasing for two reasons first because of production not meeting demand and second as the velocity of dollar sales increase outside the US the supply of dollars leaving the US increases effectively flooding the world with dollars.
Also closely related as demand for dollars increases treasuries will be sold to supply these dollars central banks holding huge amounts of treasuries will convert to dollars for exchange usage this includes the Federal reserve.
Whats important is this will finally put inflationary pressure on the US but of course not in the way people had expected. This will force the interest rates higher on government bonds and force general interest rates higher the fed will have no choice but to eventually start increasing interest rates to slow the decline of the dollar.
This will of course put even more pressure on debt holders forcing more into default and forcing more of them to use cash instead of credit for commodities purchases putting even more money into circulation at a ever higher velocity.
However for stuff bought with debt esp long term debt the situation is grim. Residential Housing, Commercial Real Estate and Auto will be facing a situation where they are in oversupply and interest rates are rising and cash for commodities is in ever greater demand.
Having a oversupply of expensive items that can only be purchased with debt when cash is in demand and interest rates are increasing is the death knell for the debt economy.
I think the interplay of the end of the long term expensive debt economy will interact badly with commodity demand and force the flow of capitol into the daily economy. And as commodity prices increase manufactures of all kinds will begin to get squeezed on energy prices and have no choice but to pass on the expense to the consumer giving way to general price increases. The cost of housing construction materials for example will be forced up but only after profit margins have been obliterated. As profit margins fall companies will be forced into default forcing up interest rates on debt those not in default will have steadily lower profit margins reducing borrowing capacity.
Attempts to throw money at the problem will simply backfire even worse as this money is put into circulation not as new unneeded production and long term debt but as short term debt and cash to purchase commodities. Not only will attempts to stimulate debt fail they will simply inflame the situation making it even worse.
Meanwhile about the only silver lining is that falling home prices and falling rents and falling commercial real estate rents will work to increase cash flow. Its not really a silver lining since it will allow former debtors to absorb higher commodity costs for some time at the expense of the mortgage owners.
Overall eventually you have no choice but to reduce the supply of cash to match a world economy that now has rejected debt. The dollar will be forced to become a commodity backed currency instead of one backed by the output of industrial production and the military power of the US government. This is the important part since military might simply does no good in this situation and military action will only serve to make the commodity situation even worse. We can neither bully or print our way out and the US is effectively checkmated.
The other fiat currencies in the world will in my opinion also be forced into a similar situation as the dollar and they will have no choice either. Everyone will have to turn off the printing presses and get the supply of money down to match a new cash economy. Some probably will not do it and I'd not be surprised to see a few fiat currencies go down in flames. The pound in particular is toast as its not the reserve currency and England is now a net energy importer with massive internal asset inflation and tepid industrial production.
Flight from the pound as it falls rapidly vs the USD/Yen/Euro will put even more forex pressure on these currencies as people convert assets from pound denominated holdings to USD/Yen/Euro.
Its important to understand that this demand for other fiat currencies is met with and almost infinite supply the key is the flow of money which is converting bank balance sheets and treasuries into short term trading accounts for commodities and into a flood of cash in the oil producing countries igniting some serious inflation.
The money is for all intents and purposes getting burned up as the producing nations begin to experience crippling inflations with to much cash chasing to few assets. Some will certainly start returning back to the nations that produce fiat currencies but it won't be as loans but as cash purchases for some now cheap assets in these countries. I think however this time around you will see more and more of this cash remain in the producing nations as they simply try and import more stuff and the governments try to start more generalized economies. Most of the money will simply be blown via money losing investments of all sorts.
Also overall this cash flow in commodities is still far less than the original debt economy so although the cash is flowing its dwarfed by the defaulting debt economy. Your talking about a 100:1 ratio with the old debt economy about one hundred times larger than the new cash economy. So even though it looks like a lot of money is a fraction of what the debt based economy used to do. However for a time at least this backflow of cash into the fiat currency based nations generally via stupid investments will serve to slow the decline of the overall economy. And in general you get a sort of bipolar economy forming. Areas that depended on long term debt will be crashing while the transaction rate is increasing in the cash economy. As any economic activity that increases the velocity of money is good for example wars which are a complete waste of resources initially spur economic development we will get a similar effect.
However its heavily weighted to concentration of wealth in the hands of a few and out of the pockets of the consumer class. What they will see is the value of there assets declining rapidly and their daily expenses increasing. Industrial production is still way in excess and so of course is labor and profit margins are razor thin to negative so wages will actually fall both in purchasing power and nominal terms.
And we probably will set in this cycle for a while it can go until the debt has worked out of the system once the system is effectively debt free then any further increases in commodity prices will caused forced conservation or demand destruction and the wheels will finally start falling off the system as it simply has no way to absorb further price hikes.
Underlying this of course will be that the EROEI simply no longer supports such a complex economy and it will finally be forced to simplify and ELP.
And last but not least the underlying thesis is simply the fiat currencies will be forced to become pegged to commodities and a new cash based economy they simply will have no choice in the matter. Eventually of course cash deflation not debt deflation will probably have to start to slow the increase in commodity prices. At that point you just as well move back to the gold standard as the fiat nature of our current currencies is of no use and your just running a effective oil peg. It does not really matter what you do since the monetary system at this point is completely chained to the oil supply thus cash deflation actually becomes a better choice.
This is a very good explanation and I think I agree with most all of it.
The only difference of opinion we might have is as to the timing and the feedback loops in progress.
For example, while I agree we are headed to a lower level of economic activity, if only because of PO, the way to that point will be a jagged and somewhat loopy road. At times the economy can and will improve. More specifically, I believe the price of oil has currently overshot on the down side as a result of the financial panic (sudden debt contraction). The relatively 'low' price of oil will help those parts of the world economy not overly-leveraged to recover. However with so many dynamic actions and reactions in progress, I doubt that the price of oil will stabilize very long at some real value (even if you assume that the value of the dollar holds constant, which it isn't).
The US is a special situation in that is grabbing what remains of excess world investment be running a budget deficit of $2 trillion that is financed in no small way by foreigners. However unless the US budget deficit is rapidly cut back, US fiscal and monetary policy will destabilize world economies further, after a small recovery due to temporarily cheaper energy prices.
So in sum, the world economy has destabilized and may become more destabilized over time for a few years or so until some type of equilibrium at a new lower step of economic activity - probably after a dollar crash - has occurred. In the further future, there will more destabilizing periods as the world economy makes sudden adjustments to falling energy supplies, like earthquakes that release the pressures that build up after long time periods.
Whats interesting is I think paradoxically its actually the reverse. High oil prices will help the economy recover.
First and foremost our biggest problem is velocity of money higher prices will go a long way to cause spending to restart. What a lot of people don't realize is it does not really matter what people spend money on as long as there are transactions. Again I use the example of war which is production which is wasted but it stimulates spending. High oil prices work in a manner similar to war. But in addition it will force the weaker players into bankruptcy and thus streamline production.
This suggests we will continue to see:
1.) Bank balance sheets erode
2.) High levels of unemployment
3.) Foreclosures continue to rise.
But its more of the same as now the banks will be backstopped by the feds. In the banks favor even as defaults increase rising interest rates will make earning look better. And they will play games with their balance sheet.
The intrinsic structure of the economy continues to worsen but outward indicators start looking better. Revenue flows start increasing and people will ignore falling profit margins. Price inflation primarily from oil will be seen as traditional monetary inflation.
You probably will even see a bit of a buying spree for houses as interest rates begin to obviously go higher however this won't slow relentless price declines.
The higher price for oil will be spun as a good thing showing demand is rebounding etc.
For automotive you probably will even see a slight uptick as people that have held off buying finally purchase a more fuel efficient new car.
The three key basic problems will be ignored. Continued high level of debt defaults. High unemployment and falling home prices.
For houses I'd not be surprised to see people finally talk about affordability and 3X income and 20% down and responsible lending. So I think this will be spun as a return to affordability. Rising interest rates will be spun as a return to historical norms.
In short the oil shortage will effectively be spun as a fake recovery. Anyone that points out the worsening structural situation will be viewed as a wet noodle and they just don't understand it takes time for housing and the banking system to fully recover and employment is of course a lagging indicator. Just wait and you will see everything is going to be ok.
And as far as oil production itself everyone will blame lack of investment from the price drop and explain that oil will be tight for a few years until the oil projects get back on track then oil prices will decline again.
So all the major bad factors will be explained away as ones that are going to turn the corner just a little bit later in the recovery.
I hate predicting the stock market but I think that it will ignore profits and focus on rising revenue flow and also consider the bankruptcy of weak companies a good thing showing how the the economy is getting lean and mean.
To be honest if the oil supply is really dropping rapidly what other choice do our leaders have ?
I mean they are not about to admit that we are in bad shape and need to get off oil or anything responsible like that.
Again, some very interesting thoughts. No doubt high oil prices generated prosperity in the Mid-east, along with some other parts of the world, and some states within the US.
It also appears that below trend commodity prices are historically associated with recession and depressions, but can raising relative commodity prices by themselves raise economic activity? An interesting idea with some historical validity when studying the inflationary policies Roosevelt brought when he came to office in 1933.
If anyone has a doubt that monetary policy does not have the last word on prices should observe the stock market’s recent rise. Some stock funds are now off 40% from their lows, which not by coincidence, were reached right before the Federal Reserve implemented its highly inflationary purchase of Treasury Bonds and mortgage backed securities with nothing other than fiat money.
It remains to be seen just how long the US can get away with printing money up at an exponential rate and having interest rates and the dollar’s exchange value remain relatively stable. Perhaps not for long - every day there are more signs that other countries want to move from the US dollar as a reserve currency.
If that were not bad enough, the IMF plans a combination of issuing more of its own money, plus having an additional $500 billion available for loans to needy countries. Perhaps the US itself will come to the IMF for funds one day.
With the Treasury backstopping US consumer debt, the Fed issuing fiat money, and the IMF giving out money for any needy cause, it does not appear that deflation is at all possible. I view $60 oil as a steal.
:)
You have to be careful with fiat currencies to qualify inflation and deflation.
To be clear I think we will continue to see massive debt deflation generally via default but with the government continuing to poor money into bank to offset losses.
What rising energy prices do is cause price inflation that will trickle through the economy.
Our Banksters love to talk about price inflation to hid the underlying monetary inflation caused by expansion of credit that devalues the currency.
Price inflation is caused by basic supply and demand and via devaluation of the currency.
In our case its a interesting mixture of both because of the petrodollar. You get a two for one deal inflationary monetary policy against falling supply.
However I think whats different this time around is it will not spur expansion of credit and interest rates will respond to the buying of treasuries and to higher default risks.
Again interest rates respond to two key stimuli default risk and monetary policy. Again in our case both are increasing.
This means that I see no end to the overall credit deflation. The money is created by issuing treasuries and then having the Fed buy them and this is given to the banks where most of it is simply destroyed backstopping defaulted debt. However we are starting to see this inflationary policy can no longer keep interest rates low and indeed the banks themselves must get more freedom to set higher interest rates to make money against the on going credit default levels.
In a sense we are exporting our inflation since these dollars are eventually headed overseas as the reserve currency however since we now import a large amount of oil we cant avoid the inflationary effects and of course since we depend on external creditors we can avoid rising interest rates.
But the average American gets no benefit. I've called this rich mans inflation poor mans deflation. We will continue to see ever tightening credit lower real wages and falling asset values in residential and commercial real estate. Industrial capacity is still in excess and this is actually the key problem with deflation and rising commodity prices will effectively increase the amount of excess capacity as spending becomes ever more focused on basic commodities.
Now I agree 60 dollar oil is a steal because oil usage is more aligned with daily life than with the debt economy. We have seen the amount of outstanding debt increase by order of magnitude over the last several decades yet oil usage was closely correlated with population .
Certainly the pull back in industrial output will cause demand to drop somewhat but only till it drops to the level required for a given population with a given infrastructure to carry out its daily tasks. My primary example is the guy driving to McDonalds uses the same amount of oil as the Mortgage Broker driving to the mtg office across the street. By far almost all of the deflation is and will continue to occur in the financial sector.
The only way out is to get rising wages and this is simply not going to happen.
Effectively whats happened is the entire fiat currency game has been short circuited and its a dead short :)
The government is giving money directly to the banks covering lending losses it completely removes the need for the banks to depend on deposits or worry about and real investments to raise incomes to ensure loans are paid back. They are not going to make new loans except at ruinous rates because they must show fake profits to keep the bonus money flowing.
They are allowed to hide existing bad debt but any bank that actually lended in this high risk environment at low rates would quickly be toast.
Now the real bubble that has yet to pop is CDS's. Whats happened is that the government has become the lender of last resort for this markets and it remains unregulated.
In effect the wealthy can now freely bed on the end of the regular economy via default and make huge money. In my opinion this is probably the biggest travesty.
Yes there is a credit short circuit, but what I am saying it is not the kind that will bring instant death to the economy.
The patient is being revived under intensive care conditions. Granted wages are not going up and may even still being going down. But the lost purchasing power is being made up by government spending, even if such spending can be wasteful - as it only gets the patient possibly out of intensive care and not completely back on his feet again. So lost wage spending may be mostly or fully made up the government spending, and net energy demands will once again be limited by available supplies.
Also I agree that monetary inflation will be confused with relative shortages-caused price inflation for energy. Further, energy price inflation may well cover deflation in other areas, so to make most believe that the upcoming inflation is solely a monetary problem.
The monetary/fiscal system the US is now operating in is highly unstable and unlikely to exist in its current condition more than a few years. After that its difficult to know what 'price' we should expect for oil. It is likely we will discussing the price issue a great deal here at the TOD in upcoming months, and this is not the last word on the issue.
Funny I also give it two year in a reply up thread.
I've seen people work through the issues from all kinds of different perspectives include peak oil and not and two years is a very common number.
What I find really interesting is the financial types come up with the same numbers without including peak oil. In general they are looking at the result not the real underlying cause.
This suggests that as noted the oil problem has been building for some time.
As far as price itself goes I really don't see much evidence for a stable price above 30 dollars a barrel. The economy is geared toward cheap oil. I just don't see any near term top for the price of oil. You take infrastructure designed for cheap oil and then take away the cheap oil and your left with one thats forced to basically pay any price to keep functioning.
Sure at some point the price will be high enough that people reducing oil usage will slow its rate of increase but as far as I can tell the oil price will in general simply go up tell the wheels fall of of the system. We will collapse before we ever hit the price of oil that finally causes the economy to give up on oil. As best I can tell the price range where oil both becomes untenable and substitutes make a lot of sense is 500-800 a barrel but I just don't see things hanging together long enough for us to actually reach this price.
Thats the price point at which demand itself has dropped to the point that substitution is viable. The problem with oil is we use so damned much of it. The shear volume of oil consumed every day is the real problem and highlights how deeply ingrained it is into the structural fabric of our civilization. You don't replace a system of that scale rapidly.
Thus the price would have to go surprisingly high just to scale oil usage down to the point that substitution is feasible. This suggests that oil usage is a type of "destroy the village to save it" problem. So I don't really see any constraint on oil prices and I also don't see the system hanging together long enough to become reduced enough to allow it to transition.
Why should there be some sort of stable high price for oil ? I just don't see it. Either we have a oil based economy or we don't its a boolean problem. As long as we use oil in such large volumes then no price is to high or more correctly the rising price of oil will cause other parts of the system to collapse before the actual price of oil causes collapse.
memmel,
"The problem with oil is we use so damned much of it."
raising the CAFE standards to 39 mpg by 2016 is going to result in a lot less being used, that allows a higher price to have less negative effect on the economy but still squeeze out the old gas guzzlers that are left. An increased gasoline tax would help, but prices will probably rise fairly steadily as the Chinese economy expands from 6% growth rate now to 8-9% growth rate. US consumption will no longer be the price setters, so improved CAFE or recessions in US will not smash the price back, eventually OPEC members are going to realize its better to leave oil in the ground than sell for a low price.
Though I can agree with a lot of the analysis upthread, I still find it far too US-centric to be realistic. The US economy, though huge, is still only 20% of the world economy, and things can happen quite quickly internationally, vis. China in the past 10 years going from generally considered basket case to real contender for number two. Strange things can happen. Economic aliance between Japan and Russia makes obvious sense. Koreas unite and open up a huge market (N Korea) backstopped by the economy of S Korea. Then they set up economic co-operation with China. The list of possibilities is nearly endless, none involving the US. Or, consider de-valuation of the $US to a natural level internationally if it looses reserve currency status. 50%? One would now be talking of the US economy being 10% of world economy.
Perhaps because the US is so vulnerable to a reduced place in the world market, it is easy to write about how bad the oil situation is for the US. There certainly are differences around the world.
I think that the debt market is world wide, and reduction in debt availability will have a major impact in many countries around the world. Russia right now seems to be struggling greatly with the lack of debt for future investment. China is clearly doing better.
The fact that the economic downturn is so widespread in the world gives a clue that the downturn is related to something like oil, rather than something local, like the US subprime crisis.
Gail,
The fact that the economic downturn is so widespread in the world gives a clue that the downturn is related to something like oil, rather than something local, like the US subprime crisis.
This is starting to sound like " the answer is oil, now what was the question?"
You may not have noticed that China's economy is growing at 6% pa and predicted to be 8% in 09/10. how come, have they found a substitute for oil? or are they less influenced by a financial crisis because they don't have sub-prime mortgages, Australia is predicted to be going into a recession, and yet employment has grown by 1% over last year(no sub-prime mortgages). Australian banks have been borrowing money from the US market! so funding is still available but not to insolvent companies or banks. Wind farms seem to still being built in US (2800MW completed QI/2009).
I think it is becoming clear that the world recession was not induced by high oil or energy prices but was a financial crisis. The proof will be when we again have $140 per barrel oil prices and an expanding world economy. This will continue to cause more pain in US because of the very high oil consumption, but as the automobile fleet is progressively replaced by high mpg vehicles the pain will become less an less even with rising prices.
Best wishes for a speedy end to the recession in US and hoping for a very mild one here in Australia.
I have always claimed that the post-peak oil price will never be higher than what the shrinking economy can push it to. Higher than today probably, but not extremely high.
The price of crude oil, as all other commodities, is set on an speculative market where speculators rarely look more than 6 months ahead. If there is a wide-spread perception that the economy is shrinking, for whatever reason, then this will impact all commodities, including oil.I think this applies under the current curcumstances with a credit based money system.
If some other type of monetary system is adopted, then I think investors and speculators will look further ahead, and I think non-renewable resources such as productive farmland and oil will be valued significantly upwards...
I hope someone (other than me) notices that we are creating an interesting model here...if oil prices go up it can be seen as proof of inability to produce oil, i.e., peak oil.
But if oil prices go down it is because inability to produce oil slowed the economy and demand, i.e., peak oil.
So the proof of inability to produce oil, i.e., peak oil, is either low prices or high prices. Heads I win, tails you lose! :-)
Thus my new slogan, "All evidence, if understood correctly, proves I am right." (lol)
RC
Well if we don't have and expanding economy with expanding oil production at a cheap price then we peaked.
We could be witnessing the beginning of a series of increasingly large spikes in price followed by increasingly large economic contractions. The economy may lurch from crunch to crunch with the ferocity of each cycle intensifying over time. The bottom of each price wave cycle becoming higher and higher as we move toward more marginal sources of oil.
Welcome to economics!
To be honest, what seems to be the accepted model says that peak-oil can be recognized by oil production failing despite efforts to make it highter (that means, no blocade or cartel commanded reduction), now what follows peak-oil is surely an increase on oil price, except for the possibility that it is a reduction.
As long as governments (incl the people in democracies) assume (1) or (2) will work, then decline will be mismanaged. For the current debt problem: the US government has on the table the option of a giant inflationary debt jubilee. They might stumble into it by accident. The Reserve is buying bonds to pump money out. Commentators like Klugman say that they will sell them back when inflation hits, but actually there may be no buyers then without high interest rates which the government will not be politically able to allow.
If we can get over the current debt mountain, then the decline can work better. We've started late to tackle PO and now we have to sell the people on 15 years of decline followed by a gradual return to prosperity based on other energy, and we'd better keep all options open. There's no doubt that China and India see nuclear as the main part of the answer. If we're putt-putting along on wind turbines and solar farms then we're going to be relatively weaker, and most people are going to see that as a problem. [I'm in Australia and by "we" I mean "the West". Proximity makes us less comfortable with a world dominated by Chindia than North Atlantic countries.] Ostensibly China and India are going to be harder hit by partial collapse, but they are much more used to poverty, and both are disciplined societies in different ways [If you think India isn't disciplined: imagine a society where people in lowly occupations accept that their children will follow those lowly occupations.] Anyway my current guess on how things will play out is that oil won't run out, nor will prices go into the stratosphere long term: instead we'll have a series of steps down with most people getting poorer and not using much oil, but that there is oil for core activities, like building new energy infrastructure [initially for a less prosperous lifestyle, so America's current 20% nuclear will expand to larger %s, apart from additions.] Australia will ship coal and CNG to the world as fast as possible to ensure that we join the end of fossil fuel party along with everyone else.
Gail...
Is it just me or don't these appear to hold a common assumption.....a bias, if you will, towards US/Euro markets only.
That the market factors are based on an economy that has financial markets tied into mortgages....this may be the fact in certain parts of the world...but not all, right?
Take China (which only recently approved of the idea of credit as I recall) or Islamic (no usury) republics. In fact, what would be the process if these parts of the loop were factored out of the flowcharts?
And have we factored in the growth in auto sales in China and India? So even if consumption decreases here, isn't it more than offset in those places?
And on another note....it might be true that there will be less purchased goods as societies move back to more agrarian styles of living and engage in more barter and trade.
Food for thoughts?
You are right--this is pretty much about the US and perhaps other developed nations. The situation in other countries will be different.
It seems to me that the wave of debt defaults is barely started, and will go on for years. These defaults will be very destabilizing to the international monetary system. A lot rests on how the international monetary issues work out. If China finds itself with few trading partners to sell its manufactured goods to, and inadequate food and water for its hungry population, it could find itself in very bad condition. (Same for India). So China and India may have their situations work out differently than the US, but not necessarily better.
There may be less purchased goods, if the world goes back to more argrarian styles of living. The question is whether there will be enough of the basics to keep the population alive. The answer may be different in different parts of the world.
Another approach:
Once the world discovery rate is about 25%, one type of feedback loop looked like this:
The feedback loop looked something like this:
low discovery rate (25%) – large number of dry wells – large volume of exploration drilling – large number of drill-ships – large number of staff – expensive oil and gasoline – large investments and subsidies into the oil industry – high revenues of the oil and service companies, high dividends for investors – a drop in the quality of life of the population in oil-importing countries.
The determining factor in this loop is the “low discovery rate”, which results from the unreliability of the predictions based on seismic data, which serve as a foundation for laying wells.
Let us assume, for now just hypothetically, that there is a highly productive Х-technology for detection of hydrocarbon deposits that provides a discovery rate of 75%. In other words, 3 productive wells for each dry well.
How would the above-presented loop change if the Х-technology was to be used? It would be like this:
-high discovery rate – small number of dry wells – a reduction in the volume of exploration drilling – a small number of drill-ships – cut-back in the workplace number – cheap oil and gasoline – average investments, subsidies and dividends – average oil and service companies revenues – an increase in the quality of life of the oil-importing countries.
www.binaryseismoem.weebly.com
A.Berg
geolog -- Actually what you describe as "highly productive X technology" has been utilized to a fair degree over the last 15+ years. The "X" has been a combination of greatly improved 3d seismic and advanced drilling/completion techniques. I’ve been a petroleum geologist for 35 years and I can attest that finding oil/NG has never been easier. It’s difficult to quantify the improvement but I’ll offer it this way: there have many thousands of wells NOT DRILLED in the US because of seismic improvement. This has been especially true in the NG trends. Currently, in many US plays, if an operator doesn’t have good supporting 3d data the project won’t even be REVIEWED by most potential partners let alone drilled. Additionally, many wells (Deep Water) could not have been drilled or successfully completed (shale gas plays) with out major advances in this arena.
Will dry holes continued to be drilled? Obviously there will be failures. The tech is great but it’s not 100% accurate. More significantly, most dry holes today are drilled not because the tech fails but low probabilities of success are accepted. This is especially true during periods of high commodity prices. The nature of folks to gamble (especially with someone else’s money) tends to control much of the effort. I’ve seen operators generate 10’s of millions of $’s profit for themselves by drilling dry holes.
If I read you correctly you link high exploration/development costs to increased prices for oil/NG. If only that were true. I would be a very, very rich fellow these days. There is no link between what it cost to develop an oil/NG field and what price that product is eventually sold for. Today there are 100’s of millions of $’s of reserves being sold for less then it cost to develop them. Just check the press releases and annual reports of the unconventional NG players. The current market determines the selling price. The only option an operator has is to not sell when prices are low. But very few can afford to give up cash flow even if it means selling for less then costs. But low commodity prices will lead to less drilling. More importantly, they also lead to less risky projects and a higher success rate. As a personal example, back in the mid-80's when the price of NG dropped to less then $1/mcf I generated a shallow gas drilling program in S Texas which was successful 23 out of 25 efforts. Why did it work so well? I was using proven seismic technology at a time when no one would invest in a well unless they were very certain it would work. When prices are high folks delude themselves into thinking that their few great successes will pay for all their dry holes. As a first hand witness I can assure you this logic seldom ever succeeds.
ROCKMAN,
Thank you for replay.
However see indicated link, please. I hope you understand me. It is about direct detection of accumulation using new physical phenomenon. I sure oil industry prefers to drill dry holles and go slow ahead keeping high prices.
geolog -- checked your link. Wish I could read that language. But from the pictures I gather it's talking about some sort of electrotelluric type analysis. I've been a big fan of variouis "black box" techniques for 20+ years. Radiomentrics, micromagnetics, etc. I've even conducted field tests which actually produced amazing results. Unfortunately I've had little success getting others in the oil patch interested. We can be very stuck in our old ways. Oddly I would say the advances in 3d seismic has hindered interest in all other remote sensing technology.
Do you have any other similar links in English?
ROCKMAN-
"Do you have any other similar links in English?"
The www.bineryseismoem.weebly.com starts from .pgf file in English. Did you download it?
geolog -- your original link did d/l but it looks like Russian. Theis last link you posted show a response; "Website not Published". Must be something amiss in the link structure.
ROCKMAN- just I check my web.
http://binaryseismoem.weebly.com It works good now. You will see:
"Please, open the .pdf File to see presentation in English"
Gail, I totally agree with your ideas.
BUT:
You shouldn't forget the change in PURCHASE POWER due to the overall economical slide (supposing that there won't be sufficient shortage mitigation measures IN TIME).
So a price that may be cheap today may be (too) expensive tomorrow.
And this changes the entire picture.