 | Drumbeat: January 1, 2010 | The Oil Drum | How December 2009 oil prices compared to what Oil Drum readers expected; a new price poll for 2010 |  |
Where do you expect WTI oil futures to close on December 31, 2010?
Posted by Gail the Actuary on January 1, 2010 - 10:40am
Oil will make new all time highs and close 2010 higher than $200
2% (58 votes)
Oil will make new all time highs and close 2010 between $147 and $200
6% (179 votes)
Oil will close 2010 between $110 and $147
22% (675 votes)
Oil will close 2010 between $90 and $110
39% (1200 votes)
Oil will close 2010 between $70 and $90
19% (597 votes)
Oil will close 2010 between $40 and $70
6% (190 votes)
Oil will close 2010 under $40
1% (39 votes)
I have no idea
4% (137 votes)
Oil futures contracts won't be tradable by December 31, 2010
1% (20 votes)
Total votes: 3095
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Two forcing factors have to come into play when one tries to predict a price number for a dynamically fluid economy:
1. Will the consuming public have enough money to pay for scarce oil (demand base)?
2. Will there be enough profit margin for Big Oil to keep drilling and supplying at the projected price point? (supply chain)
It seems like these things get overlooked when many people look at the question. A couple of graphics to keep in mind:
The above illustration shows why it is hard to get oil prices to rise. If they do rise, people have to either cut back on loan payments (causing debt defaults) or on discretionary spending (causing recession). I suppose if there were really savings, this would be affected first, but for most Americans, savings are not really an issue.
The above graph shows an estimate by Cambridge Energy Research Associates of how much it costs to produce new oil of different types. (If wells have already been drilled, the continuing costs are lower, but these wells deplete and need to be replaced. Thus we can have some continuing production, even with low prices.) Nearly all of the production available to OECD oil companies are in high cost areas. If prices aren't high enough, they won't want to drill.
So we need high priced oil for oil companies to have an interest in producing, but it is hard for family incomes to pay for this high priced oil.
Of the two, I find that CERA chart to be the most chilling. It says in cheerful yellow that a world with $50 oil (sustained) is a world using less than half the oil it uses today.
The upper bound of "Range of Marginal Full Cycle Costs" can also act as a proxy for the "Above this price we dip back into recession". There's probably another line not far enough above it for "Above this price we drop into global depression until renewable energy takes over".
I'd like (if that's the word) to see that chart with a time axis, since each of those areas will be growing in cost over time.
The Big Squeeze is on, and we've got front row saets.
I find it more amusing than chilling. A world using less than half the oil it uses today is more likely to be a world with $200 oil. It's just basic supply vs. demand curves. Somebody didn't take Economics 101.
Maybe it will be $200 oil, if people use a whole lot less than they do today. How do you propose that people, with the same incomes they have today, will pay for oil and food? This is the part economic textbooks leave out.
I propose that they won't. They will have a choice between driving and eating. If they can walk everywhere they need to go, this will work okay for them.
Unfortunately, most people in the US do not live in walkable communities. This implies that a lot of the sprawling, far-flung suburbs will have to be abandoned in future. I think this process has already started. It's the beginning of the end for the car-oriented society.
At least, that's my reading of what post-peak-oil society will be like: Walk and eat, or drive and starve - your choice.
When it gets to that point then yes people will obviously choose food.
However understand that long before this becomes a issue the entire framework of debt and fiat currencies are gone. So as far as we are concerned when things reach this point its a utterly different society dealing with the issue.
I made a longer post below but in short well before we get to the issue of people allocating income or labor to food and transport the current monetary system and government etc etc has been destroyed.
You simply are not going to have a government offering tax credits for buying homes to a starving population.
The crunch is actually upon us now, and it will get worse. People who are not prepared will suffer.
However, the key point to surviving peak oil is: If gasoline is expensive, don't use as much gasoline. Buy a small, really fuel efficient car and drive less. Better yet, get rid of the car and don't drive at all. I worked in the oil industry for 35 years, and I never drove to work. I always walked or took public transit. Driving just wasn't cost-effective.
And the key to surviving a debt crisis is: Don't have any debt. Don't borrow money, and don't spend all the money you make. Don't buy a car if you can't pay cash. Don't buy a house if you can't put 25% down and pay off the mortgage in 20 years.
Of course, people will wonder why you are taking public transit to work and walking to the shopping center, and why you have an old clunker rusting on the street when you could afford a much more expensive car and a garage to put it in. They will wonder why you have an old house on a small inner-city lot when you could have a big house in the suburbs. You just have to learn to ignore them.
This is not the American way of life, but it works a lot better when the crunch hits.
Except for this part I generally agree with what your saying. However one hast to imagine that people will simply have to deal with at least fairly regular bouts of unemployment and accept lower wages.
I simply don't see what your suggesting is viable. If its really TSHTF time then things will worsen in general on a yearly basis and randomly on a individual basis. Cash flow to consistently make a fixed note is simply not going to be possible for many.
One has to assume that at the minimum given stressed conditions housing prices would fall at 10-20% per year. Your far far better off renting than going long on housing under such conditions. Financially you come out way ahead. Making a one way bet on anything 20 years from now simply seems foolish.
If your thinking of buying a home then your probably not looking at 10,000 dollar or less trailers. If so then if you do want to actually buy then it makes more sense to save and pay cash later.
Your 20% down number for the typical 100-200k reasonable home right with a 20 year loan is 20-40k of cash and a decently high monthly payment. Plus taxes etc. If houses are falling in prices at 10%-20% a year then your investment is wiped out in 1-2 years and your significantly underwater in 2-3 years. If you have to sell and want to square the deal then your bringing 20-40k to the table. No way would you cash flow renting so if you you can't sell and have to move you would be bleeding cash for years.
I've literally set down over the last few days and run some numbers.
I'm not rich but if you read my post I have had a my own bout with financial ruin about ten years ago since then I've taken on debt and saved.
Not a super saver but comparatively prudent. I have about 50k in the bank now. My rents 1300 a month plus food etc comes to a bit over 2k a month expenses. I plan to grow a garden this summer and will do a cold frame later in the year so I can just buy seed. I expect this will help with the food expenses and I'll cut some of my other extra's etc. Perhaps get some cash work here and there on the side and help with the bleed.
Now with 50k I could buy a ok house in many areas of the country. I'm a computer programmer so I could bet on some contract work here and there and should at least be able to get a full time job paying minimum. Health care is pretty much out unless it came with the job. And of course my wife could work. If I went this route I'd probably be able to get at least a 50k from both sets of parents or 25k each to help buy the house perhaps a bit more. This puts me in range for a cash purchase on a 100k home which even now can get a decent enough place in middle america.
A fixer would be fine as I'd be assuming work was random. More gardening to cut food costs so bigger yard. If I stay out of the snow belt and have to drive to work I'm happy enough using a motorcycle or bicycle.
Now the question is does it make sense for me to "jump" now ? Its doable and I've looked. In the Willamette valley region of Oregon I'd be looking at and ok trailer which would be a issue with my wife but outside of that its doable. Or I'd be taking a 50-75k bank loan out for a reasonbly decent house plus 100k.
Now at that point I'd be flat broke so assume a 10k reserve but not a huge issue.
A 50-75k loan is 400-700 a month or so depending on taxes etc. Figure variable payments of at least 400 to pay back the inlaws. But thats the beauty I can miss payments to them under duress no problem.
No way could I rent a decent house for that much in this area so its already 50% less than rent.
So does it make sense ?
Well first off back to the top and lets go with my what I really think.
If oil hits 150 again then housing is dead 20% decline is a joke 30% is probably optimistic assuming this is it more like 50% decline.
So my 200k homes are now 100k homes and my 100k homes are now 50k homes.
If I'm off a bit then fine 25% or so over two years instead of one. Same difference in the end. Rents here for houses are just a bit over 1000 a month but they will certainly nosedive as unemployment will worsen so figure now houses renting for 500-700 a month fairly quickly under these conditions and falling probably later than sooner i.e rents will be sticky at first before they collapse.
Now assuming I can scramble or even just unemployment however you want to do it it its a safe bet I can cover 50% of my rent with cash flow this year. So I'm pretty sure to survive I'm looking at most at a 10k hit to my savings leaving me at 40k at the end of the year.
Right now of course the 100k houses are in areas where even minimum wage is a good find so buying a home that I could afford may easily cost 30-40k in lost wages.
A 20k drop in prices is a huge wipe cash or not does not matter.
Thus at the moment I'm far better off to try and survive one more year exactly where I am pay the rent and scramble a bit to keep the bleed down.
If I land a good job I'll of course take it if not my goal is simply to do my best to cover expenses and not bleed any cash. Simply not losing money this year would be just fine.
Next year I'll run the calculations again and see how things went and where I'm at. If its simply not looking good for me then I'll move in with my parent and look for a steady job at any reasonable pay they have a lot of land and would help me build a house on it but I'd need work.
We won't even go into what my wife thinks about living next door to my parents :) Lets say its a valid plan financially with social issues :)
You can see that I simply can't come up with a good reason to go long housing even paying cash does not make sense right now.
Now cash plus 50k in the bank and some extreme gardening and no medical problems or issues ( still no medical insurance in the picture) is almost doable but you would have to throw in insurance realistically if you bought a house. Here again it makes sense to see how the current health care plan pans out. Having some sort of medical coverage makes tons of sense.
Hopefully you can see how someone with a bit of savings but grappling with the reality of sporadic employment is thinking. At the moment it simply does not make sense to take a loan out on a house. If your betting on having a job for 20 years steady and making a note day in and day out while TSHTF then your simply nuts.
I can't even make a cash purchase work out at the moment. Sure it would cut your monthly expenses at least in half but for the amount of cash I have I'd easily loose just as much from loss of job prospects living where homes are cheap.
Now if you have 150-200k or more in savings then why pay 20% down on a 400-500k home right now ? Your talking a salary around 100k to make the note and as unemployment rises in the higher income brackets you stand the greatest chance of being unemployed for longer going for a 100k+ salary as more and more competent people go after the same job and are more than willing to take a pay cut after six months unemployment. Many would have defaulted on their mortgages and would probably take a 50% pay cut just to keep from rusting away as they remained out of the work force.
With high unemployment creeping up the income brackets the stigma of having a bankruptcy or financial problems will lesson and these people actually become more competitive for jobs overtime if they have the skills.
They don't have a monster mortgage to service and rents on decent places have now fallen so they can and will readily do the same job for half the pay as you.
Now if you have 150k-200k or more in the bank and give up on the mortgage concept your even better off saving and waiting and seeing how things go.
In two years you would know if your job seems steady enough and if I'm right about housing then that dream house that was 500k is now 250k or less. Instead of a 250k mortgage your looking at a 50k mortgage and can readily compete for your current position if you have too at half the pay.
If it turns out that employment becomes spotty for you then you still win as you could adjust how much you pay for rent and almost anyone in the higher brackets can work as a contractor using their skill set. If your making that kind of money and your area is not good for contractors then I'd be even more worried about assuming the ability to make a mortgage payment.
Now later depending on what happens with housing one has to guess that prices will fall to the point that if you have cash why not buy ?
If its really TSHTF then between when things really go to hell and are just hanging together by a thread you should see all kinds of decent homes for sale in most areas for less than 100k. Maybe not in whats left of the ritzy areas as no matter what some people will have money but a good house in a reasonably decent area would easily fall below 100k. Lets just use 50k as a sort of bottom price before the currency itself is questionable.
Well obviously around that price its hard to pass up even if rents are now down to 200-300 a month for houses. A loan would be 375 a month for example for 50k. Assuming that minimum wage laws continue to prevail your now talking about a number that makes a lot of sense. A 50% further drop in prices does not change the situation enough to warrant not buying.
375 a month is 4500 a year so in 5 years if you lost 25k you would be even again with your savings from no rent. Assuming that rents will remain sticky trailing housing on the way down then the numbers work even better.
The key is of course once the base mortgage payment is significantly below rents then paying cash makes sense. The numbers I used make sense as far as when things become inverted. Obviously as we approach these prices loans will become very very very hard to get as default will go crazy. 50% down would be the new normal and interest rates probably closer to 8-10% on average I'd say 8% is a sure bet esp for 20% down if you can get it.
Of course between now and then there will be tons of cash buyers catching the falling knife but these same people can rent at market rates no matter how low they go and sell at market prices and take their loss if they wish so they don' matter. What does matter is many of the current crop of cash buyers will get burned badly in the next couple of years and its not and infinite number of people that have 100k+ to throw down on rentals.
My opinion is I suspect a lot of the cash buyers buying now are not really cash buyers but are various investment corps pooling money and often borrowing via business loans to make cash purchases. In reality they simply are not cash but are business loans back by some equity investment.
Say 20% cash and 80% business loan or even 50-50. They are buying in bulk 10 or so properties and getting what they think is a decent discount of 30-50%. Well if properties fall by 50% they lose everything and may our may not be able to cover the note.
Needless to say if we even see a 20% drop in prices from their current level then many of the current crop of "cash" buyers are going to try and bail. Also of course all the funny money individual loans made by the FHA in 2009 will be underwater and many of these people will be foreclosed on.
Thats just this years purchases not even considering all the crap still out there from the bubble.
In general your talking 20-30 dollars a square foot for decent houses as shelter at that point they start making sense in a depression. If your patient and have cash you probably can easily do 10 dollars a sqft. There will be way way more houses than buyers so technically they have little value its just that your cash may soon become worthless itself so might as well convert it to a house before it become difficult to even secure a title.
We can assume that unless you buy something that the rulers will covet that they in general will honer titles on homes that eventually have no real value for the most part. Simply because they can get a bit of taxes that way. If housing is seized then well everyone loses even the renters perhaps so ... and they can only respect titles and try ruinous property taxes for so long before they have a revolt on their hands. Plenty of people will be more than willing to kill for their homes even if the value dropped dramatically. At this point they really are shelter not investments.
As far as getting a place and getting the garden in and getting to know the neighbors well there is some truth to that but you have to decide how to value it. Obviously a lot of your current neighbors stand a chance of being wiped out just as much as you do. How many make it and more importantly who replaces them is open to question. Certainly tons and tons of housing all over the country and in all neighborhoods is going to be converted into rentals and tenants are going to have just as big a problem making the rent. Landlords are going to see their cash flow disappear so the properties are pretty much certain to decay rapidly. Many small towns are highly dependent on long distant commuters escaping the city life and are effectively exurbs. Others depend on pensioners and if you read Mish and consider whats happening pensioners are going to be wiped out.
So the smaller towns are going to be smashed back to whatever is left of their true local economies which I seriously doubt will support the prices for the current housing stock in those communities. Thus the largest excess of housing will probably not be in Suburbia but in the exurban small towns even further out.
Good places to consider for long term ELP but even better reason to wait and see what happens. Many towns are also probably deep in the red and will have to file bankruptcy. The rural poor a just as bad as any city gang and if you loose your services life in the area could easily get sketchy for a bit. Every reason to wait till things have settled out a bit before making a jump. For sure some of these towns will turn out to actually have kept their agricultural roots and if so farm labor to stay alive will be there plus one would expect once things shake out a bit that a real community will form. Many however will probably die and become ghost towns. So its hard to say two towns 20 miles apart will probably go two different directions with one eventually surviving and becoming the center while another crumbles. Waiting a bit and watching will help you make the right bet.
I'd argue that coming in late won't really matter all that much if your there to help rebuild and tighten the community and help it localize. However is left and hangs in there for the long haul will be accepted. In fact buy buying a house as values plummet you probably will be looked upon kindly fairly quickly as things worsen and you stay the course.
Sorry for the long post :)
But I just spent the weekend thinking about all of this and noticed you made that comment. I just don't think its sound advice and I can't make the numbers work for buying anywhere right now. Getting your shelter expenses close to zero is important over the longer term but on the same hand no matter how I slice it right the numbers simply don't work.
If we are really crashing and you have cash then it seems like its time to wait and hold. The intangible benefits of buying now just don't seem like they will pay out as the real test of the true community who it is and what it does is in the future. If walk in and throw too much cash around then get yourself into trouble then your probably far worse off as you will have caused resentment that will delay help in your time of need.
So throwing big wads of cash in a smaller town right now is stupid even if you have it. Far better to wait a bit till the town is hurting then buy at a good price equal with your neighbors and perhaps put your money in non-obvious improvements. A PV system is expensive but something people won't look at as throwing money around. A 50k house with a 100k PV system completely renovated and made green for 100k or more is not the same as a 400k new house with a 100k PV system. If you have the money in the end you get what you want but it won't look so flagrant. Plenty of big old houses in small towns and outside with good bones that can be renovated to your hearts content if you have cash burning a hole in your pocket.
Still I'd wait why blow it now ? And last but not least if you wait a bit you can always buy up some more land if you have excess cash. Indeed my dream is still to get a house in a small town for cash one day then buy some land for "camping" in the mountains cheap perhaps and abandoned home site and also some farm land. I'm sure RV's would be dirt cheap at this point and I could always move it to the camp spot or farmland spot and work both for long periods of time either living in the woods if that seem safest or planting my fields. So a little but more cash for some hidey holes probably with no real structures but perhaps a well etc basically RV hookup site with sanitation. A cabin or trailor if ones there or perhaps later if things settle out.
Just to finish in the more rural parts of the US I just cant see "troubled times" lasting for more than a year or so before local stability returns.
This does not mean we won't see insanity at the national government level god knows what will happen there but I don't see major problems in the rural regions lasting before things get back to farming at least for the local population. If things get too crazy then the US will probably fragment but then what happens is impossible to guess. I will stay away from areas that make natural borders zones as if there is fighting then borders will probably quickly develop along natural areas.
I don't see the Cascadia region fragmenting nothing for anyone to gain. However potential problems perhaps to the east with a resurgent Mormon nation and to the south in Northern CA with southern CA. Eastern US perhaps a north south east west sort of 4 square split really tough to say.
The Mississippi and Ohio river valleys are naturally important you can look at the Civil War campaigns to see various military strategic regions and the various cultural differences are less but not forgotten so some variant of what happened during the Civil War is very possible with a good chance that its the now desperate population on the Eastern Seaboard vs the rest of the east just like on the West coast is basically everyone vs LA and southern Cal and probably warfare spilling over from Mexico all along the border. Canada is of course obviously East vs West with a good chance of British Colombia or large parts becoming part of Cascadia.
The north central US and Canada with its mineral wealth and obvious conflict zone and probably a Texas centric gulf based oil state grabbing large chunks of whats left of Mexican production. I suspect there is a very good chance for Texas to actually become the nominal center of whats left of the US along with big chunks of Mexico. As far as a regional military power goes setting up shop on top of the remaining oil and at the mouth of the Mississippi makes a lot of sense. Overall as the oil age wanes it would be the power center for a time as the east cost collapses.
A little off track from the prices of houses but obviously I don't think 20% down and a 20 year loan is the correct metric for these times :)
re: Don't buy a house if you can't put 25% down and pay off the mortgage in 20 years.
This was just my advice for other people, not what I would do myself. I think that Americans, in particular, need to get back a little closer to reality. Nobody should be buying houses for nothing down and payments less than the interest costs on the loan.
However, and this is an obvious point, if you think that property values are going to fall, don't buy, rent. Let the landlord take the loss.
However (2), if you were a true survivalist, you would buy a piece of land with a nice stand of trees, and a portable sawmill. You would cut your own lumber for the house, and then (while building it) make money on the side by sawing lumber for your neighbors. You have to be a true glutton for work, but I have known people to do well at it.
In my own case, for my first house, I put 35% down and paid the mortgage off in 10 years. It was a pretty decrepit house, but a very nice neighborhood. If you can do this, it is worth it. Once you have paid off your mortgage, you can live rent-free awfully cheap if you have to. If you have to, you can sell your car, grow your own food, and cut your expenses close to zero (except for property taxes).
For my second house, I went to the receivers for a bankrupt finance company and made a cash offer for a lot (half the going price). This particular debacle had cost the taxpayers a lot of money (not for the last time), but I figure somebody should profit from people's misfortune, and why shouldn't that somebody be me?
Then I bought the lumber to build the house at distress prices (another advantage of a downturn). Then I built the house myself using my own labor. The cost of the lot: $30K, the cost of the lumber: $30K. The cost of my labor - priceless - you have no idea how much work it is to build a house by yourself. The house at this point is worth a bit less than $1 million, so I think it was worth it.
Looking back over the decades, I can see that the economy seems to crash quite regularly. It seems to be a highly predictable occurrence, so rather than panicking you should be looking for bargains. I'm a believer that it is always darkest before the dawn, and that is the time to snap up good investments - when nobody else can see them.
Default on debt. The intrinsic assumption that many people still are making is that people will not simply default in mass.
As more and more people use up their credit lines and can no longer expand their debt then they will default.
Been there done that personally. For me it was a medical situation but I used all of my credit up and when I could do nothing else I defaulted. When you hit the wall you hit the wall.
The critical factor is not the debt levels but access to more credit once that door is shut you default. It took ten years to recover and of course just as I was back on my feet I got knocked down again but this time around I don't have a lot of debt so I probably won't run it up and default simply because I don't have the underlying debt load to support.
I'll just work with my cash flow and adjust my living standards steadily downward overtime.
But it does not matter which group you are in first and foremost you simply convert to living within your means and not using debt either because you don't have access to credit or because your smart enough either from the school of hard knocks or from the start to not leverage debt.
Commodities i.e food and gasoline etc are not anywhere near the top of the list of things you cut back on dramatically when your faced with a downward income spiral.
Here is a list of how people respond to lower income.
1.) Stop eating out.
2.) Cut back on buying.
3.) Eliminate debt default/payoff
4.) Seek cheaper housing
5.) Eliminate/reduce car loans/debt
6.) Eat even cheaper food at home
7.) Use public transport conserve gasoline
8.) Seek out government aid programs aggressively
9.) Work for cash/ underground economy
10.) Your now poor.
The cost of fuel is simply in my opinion not going to change this progression of events. Sure people temporarily try and reorder them if they think that the even is short term but its important to understand that a reordering is temporary. As the situation progress eventually you will see everyone following the above order in the end.
All expensive gasoline does is accelerate the process and only near the very end do you give up on personal transport.
To understand this one needs only drive through any poor southern neighborhood and see the Cadillacs or 4X4 monster trucks depending on the group in front of the shacks. Or the new Toyota's outside of lower end apt's. I don't keep up with the status cars but when your poor the ride is your only real form of wealth. Its like a herding culture that keeps sheeps or cow's or goats or horses as a sign of wealth.
I think people who are not poor or have forgotten what it was like to be poor forget that the auto is a proxy for a very deep need to show others your not indigent.
For all my peak oil awareness I'll keep my car to the bitter end as I can sleep in it if I have to and it can be used to take me my family and a few belongings to a better or at least different place if needed. As long as I have it I've not fallen down that last rung of the ladder.
And finally I'd argue that most people after they have eliminated debt payments will then adjust their oil consumption such that its about 30% of their gross income or less assuming a minimum wage income level.
Thus at 8 dollars and hour its 1280 a month or about 350 or so thats a maximum.
At ten dollars a gallon thats 35 gallons assume 20mpg and thats 700 miles a month or about 23 miles a day. Assuming 50% less gives 10 miles a day of mobility. Or 15% of income at 10 dollars a gallon.
Gasoline is no where near 10 dollars a gallon but even at minimum wage if your other costs are low i.e the care is paid for or payments around 100 a month or so and assume no insurance then driving a fairly significant amount 350-700 miles a month are doable.
You can play with the various inputs but obviously if driving is important its still going to be part of your life even at extreme price points and even if your very poor by American standards.
You have to have third world type demographics with no social saftey net whatsoever before a significant amount of the population is unable to drive.
Heck this can readily be seen simply be determining the number of cars registered in regions where 50% or more of the population is on welfare.
Here is a absolutely fantastic paper on the subject.
http://www.escholarship.org/uc/item/7fn925t0
I simply do not understand why people insist that the premise that expensive fuel will cause people to stop using gasoline and demand will drop dramatically leading to cheaper fuel costs.
Absolutely nothing supports this thesis.
Obviously of course over the last two years we did see oil prices collapse however large changes in fundamental demand for oil probably are not the underlying cause.
If so then the prices changes have to have been a result of lets call them interesting events at the macro level to attempt to adjust the price against a background of steadily falling supply and a large base demand level.
Certainly there are ways to temporarily effect prices even if the fundamental situation is that intrinsic demand is greater than supply.
I've given my opinion on the matter in several post now.
One game that can be played is to artifically withhold production and store it in tankers. This will send the price of oil soaring and tanker rates soaring in tandem. Then unleash it in a mini flood. Sending prices plummeting and tanker rates plummeting. Given this is what happened why not simply assume that the basic underlying cause of the last price cycle was this. Of course all kinds of events happened on top but the underlying thesis that a artificial shortage and flood was used to jar prices is sound.
It does not of course change the basic situation and its not clear how effective a second attempt would be since the ability to hide the truth plays a role in the success of such a maneuver a second attempt is probably far less effective as once its clear that no spare capacity exists any attempt to flood simply results in speculators hoarding certain that prices will rebound quickly.
Shockingly enough this scenario also fits very well with events after the price crash so again why assume anything different ?
So the bottom line is people will simply adjust first their lifestyles and then eventually their oil usage as they are finanically stressed but the final result is that in general oil usage will not change significantly until all debt has been eliminated from the system. Only after the financial system has eliminated fractional reserve banking and associated debt leverage will you finally reach the point that basic lifestyle changes force more and more people to forgo oil consumption. As employers are increasingly forced to deal with workers that are unable to drive to work they will eventually change their attitude and except the constraints of public transport and other alternatives. Only at this point do you finally get a steady and true and fundamental movement away from oil.
Between now and then there is a whole lot of pain and I simply don't see a scenario of another price collapse as highly probable. Not improbably sure all kinds of games are possible however the more they are played the more oil is burned well below its natural prices leaving demand artificially high and less likely to change during the next spike leading not to a spike but a steady long term trend.
Sure I could be wrong and I'd be happy to admit I am but it sure would be nice for people that are in the price spike camp to come back with some real secondary demand numbers supporting a massive drop in consumption. Now or back in the 1980's take your pick I have data on both that effectively proves it never happened and that may scenario is correct and its independent of "public" oil numbers.
Yup. Guilty as charged, but I think you've missed my point.
Inspired by the survey questions and the production costs chart, I chose to observe the maximum production for a given price: $50.
Your observation of only half the oil might be sold at $200 may also be true, but I assert both points are valid on the supply vs. demand curve.
I was thinking of Cambridge Energy Research Associates as the people who missed out on Economics 101.
The inference I would draw from the chart is that a world with $50 oil is a world in which the US isn't going to be producing or consuming any. That doesn't seem likely, so I would expect the future equilibrium price to be higher than that.
Of course, if the US collapsed completely, then $50 oil is a possibility, but (unlike a lot of people here) I don't expect that to happen.
Interesting pie charts.
I'd like to ask a rhetorical question. So what ?
By that I mean if food and energy costs say take 30-50% of your budget then does it matter ?
Well obviously many people are not making a house payment at that point. Given many are underwater they will default. If you rent you take on extra roomates etc. My point is on the debt side reducing housing expenses esp once your credit is blown is pretty easy its called moving in with friends and family. I suspect extend families or other full house living arrangements will become common.
Now of course the banks won't be happy but thus my question so what ?
Once enough people have blown their credit scores who are the banks going to lend to ?
What your seeing is what I think will happen people will kick the credit drug first before they kick the oil habit.
Next as far as everything else goes well you have to live and that means buying stuff if you can. Certainly it means saving for expensive items and buying much cheaper when you get something. But if you have a bit of money then you buy the kids a ice cream cone at the city park instead of taking them to and amusement park. Or a balloon or often nothing at all.
Instead of eating out you cook hamburgers at home etc.
People don't just disappear because they have less money they simply dramatically downscale the amounts the spend. They still buy stuff. Business's simply need to adjust to the new markets and realize dramatically lower profit margins if any at all. Those with debt go out of business those that can adjust to the markets the same. A lot more people work for minimum wage in new jobs catering to people making minimum wage.
Your doing 10 one dollar transactions instead of 10 ten dollar transactions in and hour. Your net minus employee costs is 2 bucks. Small businessmen work long hours "hiring" family and cutting employees.
And yes unemployment is generally a lot higher but eventually one has to assume government make work programs will help.
Do you drive less eat cheaper etc sure but you adjust thus if the pie changes shape then it changes shape ala so what its a new economy with everyone a lot poorer.
The only real loser in all of this are the banks that will simply never get repaid and of course the governments who won't get the tax revenue as you cant get blood out of a turnip. And anyone who has invested in expensive assets bought with debt under expectations of inflation.
As business's go bankrupt rents will fall and or assets from business's will be sold for pennies on the dollar the new poor with friends with a bit of money will be increasingly able to start new businesses catering to the poor for cheap. Thus the cost of doing business will fall dramatically. Governments will be forced to relax rules and regulations etc. Think flea markets street vendors etc your traditional third world bazaar.
Thus so what ?
Eventually of course housing prices and rents will fall until housing is affordable again to this new poorer class and people will leave the friends couch and spread out a bit more but probably not to much as heating and electric bills are still a big issue. I.e no matter what in general people will opt for denser living conditions than they have up till now.
As gasoline price rise more then more and more people will opt for alternatives. Probably not snazzy new EV's now out of the reach of all but the wealthy. Where weather permits throngs of scooters perhaps electric perhaps not who knows.
Gardens will become common etc.
This is what I think ordinary people will do and its just really a return back to a lower living standard than we have enjoyed if suburbia was enjoyable. More and more transactions wages etc will be conducted in cash and off the the radar. Everyone will cheat on their taxes many will simply stop filing. Cash is king.
Ordinary people simply get by and do what they have to do.
Does the next recession mean a sharp drop in oil usage and this prices ?
Probably not as there is a tremendous amount of debt that can and will be defaulted on and I'm firmly convinced that we will willingly kick the debt habit first before we work on our oil addiction. Thats not to say demand won't contract some just that we have other problems to solve first.
I'm already seeing a ground swell of people simply giving up on the debt lifestyle. High oil prices will almost certainly turn this into and acceptable action. Esp once you get used to living with friends and family in a bit tighter circumstances more and more people will realize that its actually fun to be a member of a bigger noisier group and begin to enjoy life again and stop worrying.
Its a bankster government crisis not one that people can't handle and adapt to the losers are taxes and purveyors of debt. What they will do is and open question but it probably won't be pretty. So unless your a banker or government employee its not really a big deal in the end. Overtime more and more people will realize it and as more "normal" people become poor then poor is no big deal. I suspect that flaunting of wealth will become increasingly considered disgusting on the back side people will realize that stuff did not make them happy after all.
Thus for ordinary people its really a so what problem for quite some time.
Eventually of course this 1.5 world lifestyle will become problematic and then real problems start as food perhaps becomes a problem. But between where we are now and when life truly gets hard there is a period where thinks are ok.
You don't have the material things you used to but so what ?
It really depends on the how the financial system holds up. If it doesn't, things could get worse, quickly.
I voted $70-90.
I think all the producers were pumping pretty much flat-out leading up to the $147 peak. Then came the economic crack-up and demand destruction to the tune of three or four MBPD, with a price around $30. OPEC cut production, some marginal projects were shut down and there were probably about three MBPD of excess capacity in the system.
But after the initial bout of demand destruction, consumption in the West more or less levelled out, and India and China's recommenced some growth. The price rebounded up to where it has been these last few months, more or less in the $75-$80 range. The Saudis have been pretty clear that they like this price level. Apparently there is a consensus that this is as high as it can go without triggering near-term consequences on the economy.
So I expect the price will remain more or less where it is now. As Chinese/Indian/Non-OECD growth starts to push the price much above $80, I would imagine that the Saudis would just open the valves a notch or two and kick down, say, 250,000 BPD onto the market. Prices would go down $10-$15 per barrel, but would start climbing then, a few months later the Saudis put another 250,000 BPD on the market. Rinse and repeat until the spare capacity is all used up, which I guesstimate will take 2-3 years.
After which there is a last wild price-spike and crash. At this point ELM will be kicking in big time and decline in supply will completely outstrip any attempts to replace the shortfall with tar-sands, shale oil, Fischer-Tropsch, or whatever. Indeed, the demand destruction caused by the economic crash at that point is likely to render all these entirely economically unfeasible.
So I think the Saudis will be able to maintain the current price structure until the spare capacity runs out two or three years down the tracks.
Antoinetta III
Assuming Saudi Arabia has the spare capacity they claim. I think they are exaggerating as the IEA whistle blower declared.
The overall production of existing wells was declining at about 6% per year in 2008 or 4.4 Mb/d/yr. That has to be replaced by new oil wells brought online. The price collapse knocked the rig count down to about half of its peak in 2008 and shelved many projects. The world might be lucky to get 2 or 3 Mb/d of new production during 2010. ELM continues to reduce the amount of crude oil available for export. China, India and OECD countries look set to increase their consumption. I think maximum global production will intersect with demand in 2010.
I agree with Antoinetta, I voted $70 to $90 also. I was shocked to discover that two thirds of the posters on TOD think it will be higher. No way! It takes that to keep the deep oil on the market but higher than that then the Great Recession gets much worse.
A big time drop in oil production will not cause prices to go through the roof, it will only cause fewer and fewer people to be able to afford the things produced by oil as well as be able to drive. Oil prices dropped because prices were too high, killing demand. That is what high prices do people, they kill demand. Why, in God's name, do people think prices will rise above the people's ability to pay. That is impossible.
Sure, a few people can afford the price of oil no matter how high it gets. But it is a sliding scale. That is, as prices rise fewer and fewer people can afford it. As prices rise more and more people are laid off and are less able to affore the products made and delivered by oil. Fewer people in the work force mean less demand for oil and everything else. Why is that so hard to understand?
Ron P.
The US is getting to be less and less relevant to the analysis. If you are analyzing China, the sector labelled "Food and Gasoline" would be nearly all "Food". The red sector labelled "Debt Payments" would be replaced by a green one labelled "Savings".
Higher oil prices don't have much effect on the Chinese rice industry - it's all peasants hoeing away by hand in the rice paddies. If they want to buy more gasoline for all their new cars, they can shrink that green sector labelled "Savings" a bit. Save less, consume more.
In the US, you're going to get hammered. In China, they won't care that much. Their response to an oil supply shortfall is to lock up as much of the world's oil reserves as they can, build hundreds of nuclear power plants, and electrify the railroads. They can afford to pay whatever it takes (see "Savings").
Right on, RMG.
Personally, I voted "I have no idea" as I think this is the only honest answer. I have lots of theories - the details of most have been expounded in others' threads... the supply and demand part are more easily figured out than the other factors... like inflation. Will the U.S. dollar be dumped? Will we have massive inflation? Massive commodity inflation on a general debt deflation? If so, who's going to buy all that product that China is producing? Will Chinese growth go endogenous on us? OR, maybe we can go another year basically under BAU. Looking at historical world production, we see that it was a decade before production/consumption 'recovered' to its sub-peak in 1979 - and another 5 years before really climbing above that level. So much has changed today... but perhaps the economic recession will kill demand more than we are giving credit.
I agree, FWIW.
I believe governments will continue to prop up as best they can (continue to print money) and things will be pretty flat on a global scale until at least 2012. China and India will see to that.
Then again, what the heck would I know?
Regards, Matt B
I think we will be right about where we are now. Iraq should start to recover, Saudi production will "be held in check" to preserve prices/fall off about what Iraq production increases, and Brazil will continue to produce new Tupi wells @ about 20% of their reported IP's which will make up for non-US OPEC losses. US GOM new production will keep the US domestic production about stable. Offshore inventories will be what the market pivots on - any huge dumping of those will drop the price below $50, providing new opportunities for that type of player.
Gas is what is totally unpredictable. Chesapeake, et al, seem to be increasing drilling, possibly to hold the massive number of leases they have taken but not worked yet, and seem to be willing to set pipe to produce any possible oil zones while biding their time to see what happens to the market. There is so much gas potential, even using 60% of what is reported as proven but undeveloped, that is will take the international market continuing to be low on supplies to keep the domestic market above $5/MMBTU. Tighter regulation on emissions or fracing could also help gas prices if that will allow the invoking of force majeure clauses.
Some of the shale gas plays are producing gas lower in BTU value, which in general will mean less gas liquids, so gasoline will feel more pressure even if natural gas production ramps up.
I voted for futures contracts not being tradable, but I doubt that will fully be the case. However, it does seem likely that the public dilusion about speculators will cause the government to step in and keep oil contracts between producers and consumers. With this I suspect that public futures trading will become too volitile to mean much.
I'm not sure if the world economy could cope with >$100 barrel oil, but I see BRIC demand more than making up for declining OECD demand with supply at best remaining on a plateau there should be upwards pressure on prices.
$70-$90:
Unemployment along with credit card balances and cancellations will hold diesel and gas consumption World wide at levels that will not support prices over $90. The world economy will remain depressed or worse. Oil may continue to rise thru the rest of the winter but then fall and track last years prices at somewhat higher prices.
Agree. Above $90 economic effects destroying demand become too strong to sustain price. However, peaks above $90 distinct possibility and such a peak could come at time prediction is set for.
Those are pretty tight ranges, but I picked $90 to $110. Prices have been strong all year, despite the economy. Any attempted recovery by the economy is going to keep pressure on prices (the scenario I call The Long Recession). I don't discount that prices may rise a little more or a little less than that range, but I would bet (and am betting) they don't fall much from where they are now. I think it is more likely that they spend 2010 at more than 10% higher than current prices than they do at less than 10% lower than current prices.
Ditto, $90 - $110. But probably closer to $90.
The Dec 2010 is futures price is now $87. If you buy 1 contact (for about $8k) and the price hits $97, you could make $5,000 or if it hits $110, you would make $23,000.
Are you willing to put your money on the line?
Are you willing to put your money on the line?
Oh, I already did. I loaded up on Petrobras last winter when the price crashed, and am still long. I almost bought futures then, but I am more of a long-term guy. I don't need to invest in something that could put a big dent in the portfolio with short-term swings. The PBR has almost tripled since I bought it.
Smart move. I'm going to wait for the next oil glut and price crash and then buy. It has a long wait since the peak at $147.
Yes, the impressive thing about current prices of $70-$80 is that we are seeing these prices before the economy recovers. The only way prices can stay down is if China's economic stimulus backfires.
The price of oil really depends on whether the economy can grow. If it can even grow slowly then oil prices will head up. So I voted for $90-$110.
I'm gonna go way out on a limb here... and predict that 2010 is the year that the bottom falls out, taking oil prices (and a lot of other things) with it.
Consider Gail's two pie charts.
There are three categories of where our money will go (oil/food, debt payment, and everything else.) The graphic elegantly portrays certain dynamic relationships between the categories, but there are a couple of other really fundamental dynamics going on that would require a few more charts.
For example, there is the chart that would show what happens to all three categories when the whole damn pie gets smaller. When that happens, one is reminded that although the prices of oil, food and sundries can fluctuate due to market forces, debt can not. At any given moment debt payment is FIXED at a certain amount of money until it is either paid or officially defaulted and written off of the books.
In other words, if the pie shrinks enough, then the amount of money required to service debt can theoretically become 100% of the pie. There would be blood in the streets long before that absurd extreme was reached, of course... but that's precisely the point.
This dismal situation is exacerbated by the unfortunate fact that in our quasi capitalist world of bank based money the ONLY way to create ever larger sums of money sufficient to make ever larger loan payments is to make ever larger loans.
But ever larger loans are possible only when ever crazier lenders are willing to make them... and how crazy does a lender have to be to lend the next larger round of funny money when there is 100% certainty that the borrower will not just default, but fail to make even the first installment?
I think the required slack in the system to let that happen got used up in 2008 and 2009. My personal opinion is that 2010 is the year when Buck Lightyear finds out that when you try to create money "To infinity, and beyond!" that the only place you get is way out there.
I do not see how, even theoretically, the pie chart for the entire country could ever be 100% debt. When a person defaults on debt, the debt portion of the pie shrinks, but spending continues in the food and energy portion because no spending on food means death.
G'day, Blue,
The word "theoretically" can cover a host of sins... which is why I used it. "Theoretically" a trillion dollar bills laid end to end will reach to any debtors prison in the known universe. The fact I was trying to draw attention to, and which is not theoretical, is that the amount of money due and payable by all debtors at any given moment, is a specific and fixed amount that does not fluctuate based on market factors such as supply, demand, or one's need to spend the money on food.
If one has two trillion dollars, and has debt payments of 1 trillion, then there is a cool trillion left over to buy gas and groceries. But, if the old bank roll drops by half, the legally demanded debt payment is still 1 trillion. That amount is set by formal loan agreements, and is therefore inflexible. It is arguably impossible (legally speaking) to change even if the lenders wanted to (which they don't.)
The point you raised ( "...no spending on food means death." ) is precisely the point I was trying to make. There will be open rebellion long before the absurd extreme of 'no money left for food' is ever reached.
As I said on Euan's version of this question - it could go two ways. However I think there is a spike in the dollar delineated cost coming this year, followed by the other 'dip' of what will be called a double dip recession. Actually its the new reality.
I also don't think we have more supply capability than we had in 2007, and the rise in demand from China/India is continuing linearly, putting us back to where we were before by Sept; but with a substantially weakened economy.
I don't think people will be smart enough to realise we are essentially in the post peak world (always bet on dumb), so I think the reaction by end of year will be on the low side due to renewed demand collapse.
I'm betting that this is the year that Ghawar starts to show it's age in a big way and that decline at Ghawar along with the continuing decline at Cantarell spooks the market and sends prices north of 110. I would have gone higher but for the fact that the recession and it's continued demand destruction will prevent prices from going into the stratosphere.
At some point the market has to start send a price signal about the future. I think this year more and more people are going to start calling the IEA/EIA/CERA's bluff, a la Guardian.
Happy New Year everyone!
Alan from the islands
Edit: corrected some spelling
I voted for between $110 and $147.
Here are my reasons:
1. Demand in China will be on a tear just like their cars sales. China is expecting 12% growth next year. That has got to soak up any oil saved in the U.S. and Europe IMO.
2. westexas's net oil exports will continue to fall as oil producing countries consume more of their own oil (which is often subsidized even more than American oil) in their fast growing economies. Some major oil exporters are in disarray like Venezuela and Mexico and no one knows what will happen next in these countries.
3. Ethanol production will not increase as fast as in the recent past as bankruptcies continue and the EPA has delayed for 6 months the approval of E15. Cellulosic ethanol is dead. The result will be upward pressure on gas prices as competition from ethanol wanes until just before Congressional elections in the fall. E85 will be the major way ethanol can increase until then. It is overpriced now more than ever locally, so effectively that competition is weak.
4. Most of the stimulus spending approved last spring is scheduled to kick in just before the elections. How convenient! This will result in a modest economic recovery just in time for the November elections. The recovery will increase oil demand and with ethanol temporarily held back, gas and diesel prices will rise creating demand for crude.
5. But crude oil available in the export market is falling as tankers sit in a 26 mile long line storing oil instead of transporting it because loads are not available at a rate that will turn a profit. Even if oil prices rise, the loads will not be available since as we saw in 2008 rising crude prices have little effect on oil flow.
6. The crude oil chart is very bullish at the moment and is in the process of breaking out to new recovery highs. The seasonal low around this time of year may already be in place. If it breaks out to new highs expect a run to at least $90 or more before it starts basing again.
And this is only January 2010. Refiners are in the process of buying futures to hedge their crude needs for inventory build up prior to the peak summer driving season. There is amply time for another base or two before peak driving demand in August that could take oil up to $100 easy or even more.
7. Throw in some black swans such as Venezuela or Mexico doing something stupid or a weather event such a hurricane and oil could make a run for its old highs.
As to "1. Demand in China will be on a tear just like their cars sales. China is expecting 12% growth next year." Check occasional articles running on Automatic Earth (http://theautomaticearth.blogspot.com/) for another view of Chinese economy. Quite uncertain, I'd say. More certain are Chinese ecological problems but when these kick in is very uncertain.
Hi x,
I voted with you and Alan the Islander.My guess now is that the overall world wide economy will hold it's own more or less in terms of purchasing power for the next year or so while depletion combined with declining export capacity keeps the pressure on prices in real terms.
And all that funny money is going to start showing up in a serious way sooner or later.But I almost went with the 110 dollar upper limit.If I could have voted for one hundred to one hundred twenty dollars I would have.
Off topic but I have been watching my nieghbors make numerous changes in terms of saving energy that they would have not have considered a few years ago.
My rich relative the paving contractor has been seen riding in his wife's Toyota Camry when out shopping for groceries and visiting rather than his shiny FORD f250 4by 4..
Hardly anybody around here uses incadesent lights any more.
Guys who do insulation work are busy just about every weekend doubling up somebody's attic insulation and double and triple pane insulated windows are going in right and left as old windows go bad.The local building supplies don't even keep the old single thickness windows on hand anymore.
Folks are driving less even when they are already driving very economical cars according to friends who run a garage.
The few people who are buying new cars and trucks are buying smaller vehicles or at least vehicles with smaller engines than they are trading in for the most part.
People are doing thier own lawn care again-you can buy a pretty decent riding mower at a big box with a two year warranty for less than the cost of one year of contracted lawn care.
Older full size cars and trucks are going to the wrecking yard fast-an old Impala that needs a new transmission is junked in favor of a newer but still elderly Cavalier or Escort rather than spending over a thousand bucks for a new transmission.Gas mileage improves by a third.
There will be four solar hot water systems in the immediate nieghborhood by next fall.There was only one up until last summer.
Wood fired hot water stoves that supply both residential heat and domestic hot water are getting to be very common.These stoves go outdoors, burn very clean , and will burn very large pieces of wood, thereby greatly reducing the labor involved in cutting and splitting firewood.Nearly every one of these stoves replaces an oil furnace.If fuel oil goes to four dollars and stays there the guys who install these stoves will be on seven twelves.
Folks who are building new houses are beginning to pay attention to shade and proper solar exposure.
The younger people are beginning to catch on to the difference between "right now" consumption and getting more bang for thier buck.Getting together with friends to cook out and watch a PURCHASED movie at home is taking the place of going to the treater and spending several times as much.
One of my sisters has over a thousand movies on discs and numerous other folks I know have anywhere from a couple of dozen on up to a hundred.They swap and loan a lot.Some of them have given up thier cable tv.
I have cut my own twice monthly hundred and twenty mile round trip excursions to Barnes and Noble's by half since we got good internet service.
Hobbies that pay thier own way such as beekeeping , gardening,furniture making,and sewing seem to be on the rise while hobbies that consume large amounts of money and energy such as weekend fishing trips and long pleasure drives seem to be declining.
Of course most of this activity is driven by shrinking discretionary income of fear of the same, and I live in a rather poor part of the country.Folks who live in more prosperous areas might not notice these kinds of changes for awhile yet.
I expect to see some brave soul who still has a drivers liscense on a bicycle sometime soon who is not riding just for recreation.
I already ride our Honda atv when running a lot of our farm errands rther than the pickup truck because it uses about a fourth as much gasoline in addition to saving some time.
Ok, I need to ask a dumb question. What does the option of "Oil futures contracts won't be tradable by December 31, 2010" mean? Thanks.
Nate had the equivalent option on his questionnaire last year. I presume there would be some type of disruption (credit or international trade or unhappiness with speculators) that would put an end to trading in oil futures.
Last year, the option got 3%. I was curious how that would change. Maybe the issue of speculation was fresher in people's minds then.
Taking a lazy way out. Based on regression from the low of Dec 2008 a target range seems to be between $120-130 US.
Given the current glut of oil, and what I see as unlikely to recover demand, I'd think $60-80 would be right. However, I also think that inflation will hit harder in the US by the end of the year, which will drive prices (in USD) up.
Voted 70-90. I expect the price to drop somewhat, but I also expect a significant drop in the value of the dollar.
$70 to $90
A ten percent move - up or down - from where we are currently, depending on the gyrations of the economy seems about right to me.
High oil prices are more painful to the OECD/Developed world user than the Developing world user. In the Developing world coal accounts for the largest chunk of BTU consumption, and the marginal utility to the new user of oil is high. In other words, the OECD user is embedded in a system where the historical consumption pattern has been to use much more oil per capita. But in the developing world, just a small amount of oil to the new user of oil is transformational. It will be the developing world therefore that will take oil to much, much higher prices in the next decade. They will use small amounts per capita, but the aggregate demand will be scary high. After all, the developing world's systems are not leveraged to oil. They are new users of oil--and unlike us, aren't married to a system that breaks from high oil prices.
I see the OECD becoming increasingly poorer, and turning to the preferred energy source of the poor: Coal. I see the developing world continuing to progress along its current coal-fired powergen pathway, while adding large amounts of oil but in small per-capita terms. It will be the developing world that will get oil above 200 dollars (in today's terms) on a sustainable basis.
G
High oil prices are more painful to the OECD/Developed world user than the Developing world user.
This doesn't sound quite right. The average OECD/Developed world user is more affluent than the average Developing world user. High prices will be more painful for the poor. What he really means is that there are more consumers arriving in the developing world, so they'll have more marginal impact on demand.
In the Developing world coal accounts for the largest chunk of BTU consumption, and the marginal utility to the new user of oil is high.
This confuses electricity with liquid fuel: coal isn't used for transportation in either the OECD or in developing countries.
It will be the developing world therefore that will take oil to much, much higher prices in the next decade.
He's not clear on the feasibility of substitutes for oil: Over $80/bbl EV/PHEV/ErEVs are cheaper than oil. Visualize a a column of liquid (oil, if you want) rising in a tube. At certain price points there are holes in the side of the tube, where demand is lost. As the column rises, those holes get bigger, and they widen with time. Pressure from below can push the fountain above the level of the holes, but not for long.
The fact is, those substitutes exist in both the OECD and developing countries, and are more important in developing countries (electric bikes outsell ICE vehicles in China, and China has higher CAFE MPG regulations).
There are so many variables. Since this is an election year in the US of A, my vote is at the top end. IMO, Washington will need to restart the war in order to pump up the economy. When they start that, the Muslim locals in Iraq will blow up the pipelines, and probably the wellheads as well. Red Adair, if he was alive, would be in his glory.
About that time, Israel will decide that the US is so far in that they will back whatever Israel does, and launch an attack on Iran. Iran will invade Iraq, and blockade the gulf. Probably by sinking some tankers. Israel will go Nuke. Pakistan will follow suit, on Israel and India. India will nuke the Paks, and China will nuke India. About that time, AGW will become somewhat mute, oil will be about $1,000 a barrel, and no one will have any!
Or not.
;>)
Zaph --
Well. I really like a scenario that's been well thought out. Love the chain of events. I have to admit, I was a chickens**t and just called for the next notch up above what we're at now: $90 to $110, for no particular reason.
But with all those nukes flying around (wait a minute, do all your players have missiles or will they be suitcase bombs? Jeez, think TSA can catch them? Whatever.) ... and Nuclear Winter coming on, will anybody still be worrying about getting enough gas to drive to work? I'd expect it to be $10 a barrel from lack of demand, at that point.
Nevertheless, any scenario that makes Peak Oil and AGW moot certainly eliminates a lot of fretting about the future!
I know the Israelis have aircraft capable of carrying... that is what it takes to start the end. Iran, well... China is their largest client. They have missles. Pakistan... they have missles capable of reaching Israel. India will not know where they are going when they start out, so they will send in theirs and they have missles capable of such. China, not knowing where the Indian missles are going on launch, send a few of their own, and Pakistan will send whatever they have left into India. At that point, just the few hundred tossed out by the Paks and the Indians, plus Israel and whatever minimal Iran has will negate all that global warmning for a decade or so. If China gets involved to any extent, some others will throw at them. Maybe Russia? I dunno. The level of fear and confusion will be rather high, and I won't try to predict. What I know is that the religious zealots of the various mideastern countries have the ability to do a lot of harm in comparison with their numbers.
If course, we might get lucky and only have the oil fields and the gulf shut down. That would wreak ecomoic havoc on the world economy, from which it would not recover, IMO.
Of course, no one thinks the scenario being discussed will ever happen.
Like it says below, hope for the best, prepare for the worst.
There are so many bad news black swans on the horizon, it is impossible to predict. Financial crash, demand bust --> Low $ oil. War with Iran --> High $ oil. Many unknown swans in between. I voted that I didn't know which is probably the only truthfull answer up there.
Another question would be what is the value of $80 oil next year? $80 oil ($2.90 regular) may be unaffordable but if Ben does a 100X number on the dollar to get rid of debt then $80 oil is cheapest ever.
BTW: Noticed today that premimum gas is $3.02 ... sound familiar?
These exercises have almost no value. The price of oil in USD could double, but at the same time the value of the USD could halve, resulting in no significant change.
I am expecting increased disparity between regions with completely collapsed Real Estate markets and other regions with less collapse. Either way 2010 is going to be really bad for real estate. The massive surplus inventory will have adverse effects across the board. People that desire to sell for conventional reasons, for example, moving because of occupational change - will find they cannot sell without making a loss.
Then add in the jobless recovery, which is more likely to be an increase in actual unemployment masked by government manipulation of the formula involved.
We are in the midst of a collapse - it is slow because we are watching it. All the talk of 'recovery' simply makes it easy to identify the imbeciles.
If the price of oil rises in real terms, then the adverse economic effect will cause a correction.
I firmly believe that the price at the moment reflects the cost of supply with modest or no profit. This could go on for another couple of years, until the (oil) infrastructure needs to be replaced, then we see the real undeniable in-your-face collapse. That is when the background music on the PBS Nightly Business Report goes from bold Brass with Tympani to a funeral dirge.
Are we supposed to justify our vote? OK, I voted for $70-90 because demand is weak in the US and somewhat also elsewhere with possible exceptions in Chindia. There is little to be optimistic about for the US or global economy in 2010. It will likely not collapse in the next year but it could, sending the demand down and prices back into the low $30 range, again. As long as the US government maintains the appearance of solvency it can support states and they in turn can continue to financially support their poor and recently unemployed workers. They buy some oil products but not as much as they used to do. The situation is unstable but could stretch out for years, but not for decades.
I voted (maybe it`s wishful thinking) for $147-200. Because I think people will not really be able to come to terms with what is happening unless food and fuel both get really expensive and fast. Then I want to see govts undertake crash progrmas to use remaining oil to take down buildings, start farms, wake people up to the new reality. It will be tough but what is going on (a slow grind, a slow subsiding) is far worse in the long run because BAU means more buildings are going up, they`re just smaller.
Meanwhile homelessness and poverty are rising. There is nothing that can be done without a concerted govt good faith effort.
I`m hoping, it`s unrealistic maybe, that production costs of around $75 per barrel will mean a huge fall in production when the economy crashes again and sends oil down to $30 or $40. And so anyone who has oil will then be able to charge a lot for it. I want govts to do a lot more, not just handing out food stamps, but sounding a peak oil alarm, providing help to struggling new farmers, smoothing the way for abandoned buildings to be torn down, financing them to be torn down.
I want the paradigm for how we make our way in the world to be changed. I hope the paradigm will be changed in 2010. And expensive oil could make that a reality. Cheap oil just means BAU lite. I would like to see people in China and India give up on ever owning a car. And people everywhere start to have a horror of plastic because the costs of the production and the waste disposal of plastic will come to be seen as significantly diverting resources from food production itself. If plastic is really expensive that will be easier to envision.
Do we really want to see our countries` good land turned into abandoned cement waste lands forever because we kept to "free market principles" until the bitter end?
Do we want people in the future to suffer because they can`t get rid of the buildings and take the cement away?
It is hard to get rid of cement. Better get started sooner rather than later.
Pi, the trick is for everyone to jettison an awful lot of psychological baggage. But who am I kidding?
I don't think they care what you would like. I think they would like all to own a car. Since there are about 2.4 billion of them, I think that will have a major effect on oil prices.
I don't think it's going to happen any time soon. I'm looking at one of the biggest cement plants in the world across the valley from me. It's been there for over 100 years. There used to be a sign on the highway near it pointing to "A Mountain of Limestone". Well, the sign is gone now, and so is the mountain. They're working on the mountain next to it, and I expect that it will be gone in 30 years or so, too. If they keep it up for another million years, there will be no more Rocky Mountains left.
Yes. OK OK, I KNOW maybe I`m just hoping to be able to see the cement going OUT OF STYLE within my lifetime (I`m 44). MAYBE it`s wishful thinking!
Still, I can`t help it....I hate what cement is doing to the land and water. I think more people would understand if oil prices were a lot higher.
When oil reached $147 a lot of (private) cement building projects here in the Tokyo area were canceled in mid bulldozer. That was lovely! One of the best moments in my life. If oil reaches $200 then I`m hoping to see more such progress.
Even though oil prices dropped a lot of big projects---dams, highways, bridges are now cancelled by the govt for lack of tax revenue. I JUST LOVE IT!!!
Of course this created a lot of desperation for the building co.s and they`re filling in the smaller spaces now, with clinics, parking lots, little office buildings, things that they can get financing from from the desperate banks (who are being assisted by the govt). EVEN THOUGH there are tons of abandoned buildings, they are constructing more! It`s pathological. Well, it`s more than that too: it`s like something generated by a computer "first fill in the big spaces, then fill in the little spaces" There`s something elegant and mathematical about the cement pattern being generated here but that doesn`t mean I APPROVE!!
I`ll admit it, I`m rooting for the small bugs, the green plants, the birds, the frogs......I`m praying for sky high oil prices to save them from the bulldozers.
I want the govt to come down on the side of these helpless creatures who help us so much by supporting the web of life we rely on. But what can wake people up except high oil prices??
Cement is not going to go out of style in any living person's lifetime.
This particular cement plant used to burn natural gas, but when NG got too expensive, it switched to coal. This is one of your more environmentally sensitive coal burning operations, they have reduced their sulfur and particulate emissions to approximately nothing.
If CO2 emissions become an issue (probably not, after Copenhagen), they'll just inject it into underground formations.
They're also incinerating old tires, PCB's, and sewage sludge. Anything anybody wants to get rid of, they put into the cement kilns and destroy, totally and utterly. Everything goes into making new buildings.
They recently funded half of a new water treatment plant for a nearby town. It's not that they need the water - they have their own wells. They just thought it would be a good idea to fund a water treatment plant for a nearby town.
I hope this causes a riot.
Laydeez and genlmen,
Amory Lovins
http://www.ted.com/talks/amory_lovins_on_winning_the_oil_endgame.html
I haven't seen that video before, so thanks for the link. I wonder how some people can still call Amory Lovins an oil promotor when he speaks about negawatts and efficiency improvements. It is a shame though to see how many of the things he offered back then in 2005 have not become reality today (yet).
For lack of a better vote I voted, more of the same, or the 70 to 90 range. There are a lot of factors in the mix as to where it will go, but keeping it in that range is for the best in my opinion, Just enough extra to keep funding up and just low enough to not tip the scale in the economic outlook.
What will happen is anyones guess right now. This time last week I had no clue how my week would turn out, I had a general Idea that if nothing changed I would be sleeping in my own bed and typing on my own computer. We were at that time at my brother's house in Huntsville Alabama. I am still there.
Reason why is that I could not plan for what I did not know would happen. And we can plan all week, and hope all week, but things happen that we have no control over, which is what we are doing with this vote. We think we see a trend and have voted on it.
What happened was my Mom Got where she could not hold down food, So she went to the ER they found a gall stone stuck in the pipe to the stomach, so on Wednesday she had her Gall Bladder taken out. But while she was there in the hospital my dad had a heart attack, On the same day she had her gall bladder taken out he had a stint put in his heart. They are both well and out of the hospital. But a week ago none of us had any clue that this would have been the week it has been.
So I don't think we can really say what the price will be this time next year, it is all a bit of a guessing and hoping game.
We hope no one nukes another country, we hope that no one bombs an oil pipeline/port/well/ship, we hope there is a bit of a lessening of the dire news out of the US economy, but we don't know what will happen really. Not with enough certainity anyway.
Pray for easy times, Prepare for a crash.
Charles.
I hope your family's luck improves, and the bills are someone else's problem.
My dad is Retired Military and Retired period, Dad is 74 in a month and mom is 80 in a month. Medicare, and Tri-care For Life, will pay those bills. So the Hospitals will charge say for example 50,000 dollars and they will get paid 9,000 and be statisfied to get that much.
Thanks for your concern.
Huge hugs to TOD.
Charles.
I posted this here before I saw the new poll. Its a future predition and should be in this thread.
http://www.theoildrum.com/node/6092#comment-575241
If one looks at percapita oil consumption in the US across a number of states with large variation in both average income and the local economy one finds that it does not vary that much.
http://www.statemaster.com/graph/ene_pet_con_percap-energy-oil-consumpti...
You need to disregard the oil producing states as they are not correct.
Most states are very close to the weighted average of 23.
This suggests that their is and intrinsic or infrastructure based use level that fairly independent of personal wealth. If oil supply falls near or below the level to meet this basic demand then we will probably see high oil prices regardless of growth or shrinkage of the economy barring outright collapse.
Given we have seen a steady rise in oil prices despite sustained high unemployment it makes sense to suspect we are not that far off from this intrinsic demand level.
Also US VMT has stopped falling again and continued to increase despite the combination of rising gasoline costs and rising unemployment.
http://www.fhwa.dot.gov/ohim/tvtw/09octtvt/figure1.cfm
Next the US economy has for the most part stabilized I'd argue its weak but again we seem to be hitting a sort of bottom.
If so then I'd argue its likely that we will see a continued increase in oil prices if supply is dropping. Export land alone suggests this will happen if one assumes that we are now post peak and also suffering absolute declines then this will continue.
On the financial front governments around the world are now willing to take any action required to avert economic collapse thus another collapse is unlikely over the short term. Certainly the US for example could move to subsidize gasoline prices for the poor for example or other aggressive measures to blunt the impact of rising energy costs. Other governments are likely to try similar policies. Perhaps the US would be forced to take action as others try to offset the effects of rising energy costs.
Of course such actions esp if they became widespread would simply make matters worse but I just can't see any country allowing its weakened economy to collapse further because of high oil prices. It makes sense that several will take aggressive action to insulate their economies and if enough take this route it forces others to take action.
Its probably a very safe bet to assume that China will do what ever it takes to blunt the impact of rising oil prices and they have enough dollars to subsidize oil for a long time. If so then they alone are enough to force other countries towards subsidies. India for example etc.
So overall I simply cannot see high oil prices being allowed to naturally cause economic contraction.
And I think that the US and probably many countries are much closer to what I call structural usage thus further drops in usage levels become exponentially more difficult as fundamental changes are required.
If such a situation develops its effectively economic warfare and will eventually cause some economies to blow up.
At some point if such a scenario does play out then one has to guess that free market oil will become a thing of the past as countries cut deals with oil producers for exclusive access in exchange for all kinds of incentives besides money.
I could readily see China for example agree to develop a large number of nuclear reactors for a oil producing nation in exchange for oil its a win win situation.
So we just have to wait and see what happens however if you think about it many countries have already massively increased the level of government debt they literally cannot afford to allow their economies to collapse as now it would be a complete collapse. Japan for example is at the point of no return for sure. If high oil prices become a problem it basically has no choice but to subsidize given their debt levels another bought of economic contraction is probably the death knell for the Yen.
I'd argue the US is in the same position it simply cannot allow another contraction as it would become obviously bankrupt at that point. There is now a incredibly long list of countries that have expanded government debt to save their economies to the point they really don't have any choice but try any prevent contraction at all costs or default.
So it fairly obvious if this is true then a vicious circle will be set in motion with subsidies shielding consumption and thus resulting in higher prices forcing more and more countries to adopt ruinous subsidies or fall into economic collapse.
Thats my prediction for 2010. As far as actual prices goes who knows ? There really is no limit if this scenario actually happens.
I think a lot of people predicting another recession keeping a lid on prices don't see we have already bet the farm if you will during the last recession. Governments literally can't allow consumption to fall naturally.
Or the fail. Eventually of course they can't stop it from happening but the misguided spending now has effectively doomed us going forward.
This is my view also. Higher world prices for oil and food, followed by the domino collapse of small and medium sized debtor nations, as the IMF runs out of capacity to rescue defaulting governments.
Statemaster has the credability of a drunken sailors war stories.
Example: Nebraska has 1.66 million registered vehicles and 721 G/V/a consumption. With a pop of 1.7 million that is nearly 17 barrels per person per year, and thats only for vehicles.
Ref: 2009 world almanac page 125
Plenty of other sources for the actual numbers but in all cases they are tightly clustered about the mean across all states that are not oil producers that was my point and would be for oil producing states if done correctly with true consumption numbers.
You can go here.
http://tonto.eia.doe.gov/state/index.cfm
Plenty of data but no easy link to per capita consumption by state and you would have to go elsewhere to find median incomes.
The claim many people make thats in my opinion simply wrong is that as oil prices rise people can't afford them so will cut back esp in oil consumption leading to falling prices.
Underlying this claim is the belief that high oil price induced recession resulted in a dramatic fall in consumption.
The fact that oil consumption is amazingly consistent despite a 30% variation in median income or more across the US suggest that income levels are not critical to oil usage. Higer oil prices would in effects simply lower income.
Now thats not to say people don't try and conserve some and also succeed in actually reducing consumption but it does suggest that its probably a relatively small number. Certainly there is true waste in the system thats trimmed a bit under economic hardship but the numbers suggest that the bulk of the oil usage is structural i.e to really cut back would require using alternative transportation modes. In short you can do less but if you do anything its by car.
The next piece of evidence thats used to back the claim that oil consumption falls dramatically when prices are high is back in the 1980's when oil consumption supposedly plummeted. Proving this false is very difficult however given the above it makes sense that this data can't be true.
In a yet to be published or as far as I know even reviewed work I've submitted to the oil drum I figured out a method to calculate oil consumption without relying heavily on public data.
Guess what.
The great pull back in consumption in the 1980's never happened.
Its completely false.
I hope its either rejected or published soon so I can get it on a web site because its important since it suggests that people are badly mistaken and the real historical evidence paints a very different and far more disturbing picture.
Now later on CAFE standards and the efficiency wedge did work to actually lower oil consumption and then dramatically slow the per capita rise. But these took time to have and effect years in fact. My data correlates well with the influence of slowly rising fleet efficiency that was basically global as more efficient cars where manufactured.
If you look you will find there is simply no data outside of official oil consumption numbers that supports a rapid change in oil consumption of any large magnitude. This makes sense as real efficiency gains take time to implement increasing the fleet efficiency is dependent on the replacement rate thats measured in years. Improving household energy usage is the same measured in years and decades not months. Alternatives to the automobile are simply not as convenient and thus generally are not long term efficiency gains.
Certainly the absolute contraction itself results in lower fuel usage simply because less goods and services are purchased but this is on top of moving to cheaper goods and services. As and example it takes just as much gasoline to go to the store and buy a bag of rice and beans as a bunch of prepared foods. Assuming you also purchases some perishable food items at close to the same rate then the absolute number of trips is close to the same despite your grocery budget cut perhaps in half or more. At best the actual gasoline usage for purchasing foods might be cut by 50% if you manage to cut your trips in half.
In general the assumption of dramatic changes in oil usage during recession simply does not have a lot of support. Heck during the depression oil usage fell only one year then started rising again. Indeed if you look at VMT data mileage driven has already started rising.
The reason why most of the posters on this board are probably going to find out they where badly mistaken in their assumption is simply because no one seems willing to spend the time to understand the nature of oil demand. We have post after post on economics and oil production yet effectively nothing on the demand side outside of some older and excellent posts on efficiency wedges.
The entire concept of recession induced large drops in oil usage resulting in low prices turns out to rest almost entirely on government claims they they happened with no support from secondary data.
If I'm correct and you consider my original post that governments have now borrowed so much money they literally cannot allow economic contraction.
Then we have a huge problem. First of course absolute changes in oil consumption are only marginally effected by economic contraction. If you look at the VMT data it did fall steadily year after year as we saw really high oil prices. However this also meant it was approaching its intrinsic structural limit. We probably are effectively on the structural use limit now. A new recession driven by high oil prices will naturally do little to collapse demand and worse its already reduced by both high oil prices and the last recession.
On that note one part of the puzzle thats seldom look at is the effect of the housing bubble itself on oil consumption. Everyone that wanted a house was given one except the mortgage payments took a huge chunk of their income vs renting. Many many people where made house poor. Of course the initial response of these new home owners to rising fuel costs is to cut back and hold onto the house at all costs. This dramatic impoverishment of Americans by duping many into unaffordable housing in the face of rising energy costs played a huge role in pulling down VMT. While existing homeowners HELOC their way to wealth keeping consumption of consumer goods high while not boosting overall gasoline usage. Sure they bought new cars but often these where more fuel efficient then the ones the replaced at best effectively a draw. Thus existing homeowners surged their consumption of goods and services via heloc's without a dramatic increase in fuel usage and the new home debtors quickly cut back to eating ramen noodles to save their homes.
Well it worked until it did not. Eventually of course the debt load was unsustainable and the scheme collapsed. The new home debtors defaulted and in general increased their fuel usage and the HELCOers now underwater started eating ramen noodles to save their homes. Overall consumption of uneeded goods and services dropped dramatically and fuel usage did not change a whole lot as one class went down and one went up with the new homeowners defaulting on their mortgages and increasing cash flow while the HELOC nuts have not yet cut back dramatically on fuel usage.
Regardless whats important is that by convincing people to allocated a tremendous amount of their income to housing debt either via heloc's or purchase we had a magical economy that was able to grow without a dramatic change in fuel usage indeed overall VMT was flat or falling during the period. Rapid fleet turnover that probably resulted in overall efficiency gains simply because the newer cars where more efficient. You replaced a five year old suburban with a new one same for trucks etc. And of course you had and absolute fall in VMT.
The housing bubble is important because it turns out peak oil was well in the past and it was our post peak solution. Thats what our glorious leaders dreamed up as a solution to peak oil. Underlying it was the assumption that people will cut back to save their homes and rising prices and equity extraction would buoy the economy. As needed these home slaves would purchase increasingly fuel efficient new cars to offset absolute declines in oil production. Thus these home debtors either would be able to leverage their equity to accelerate fleet turnover and this rapid increase in the efficiency wedge would offset falling oil production. Eventually cumulating in EV driving suburbia with 100 year multi generational 2% home loans.
Now of course this brillant scheme has failed and home prices are falling.
If you open your eyes you will see that Obama is desperately trying to salvage the scheme via cash for clunkers and the wide variety of programs to stop the fall in home prices. They don't have a plan B they bet the farm on the housing bubble allowing faux growth to transparently take us post peak.
The whole scheme rested on the belief that people would save their home.
And its not just the US but the entire world has bet everything on people striving to keep their homes and pay their mortgages with rising valuations allowing "growth".
The reality is at the end of the day the structural need for oil is greater than the need to service debt and "save" your house. Our addiction to oil is far stronger than our addiction to the American Dream and runs deeper. We are I believe going to find that out over the coming months as it becomes obvious that when push comes to shove people will give up on ownership in order to try and maintain their daily lives as they are massively underwater on their debt obligations.
And back to my original post the worlds Governments have bet everything on being able to reinflate the housing bubble as its the only solution they have to peak oil. And by choosing it they literally now have no other option. Because we went this route once the choice was made all other options where made impossible. They are not trying for a plan B because plan A eliminated all alternatives outside of collapse.
Of course this means peak oil is well in the past but yes I have data that shows this. We just lived through the great post peak crisis and it was met with a insane solution that eventually failed.
I hope that the Oildrum will review and reject or accept it one day as if I'm right then its important that people understand where we really are and why. If I'm correct then the responses to the current poll are based on a flawed data set and the future is quite different from what many expect.
We are in reality on the edge of collapse where intrinsic demand for oil can no longer be met by supply and their is no plan B.
Thanks for the web site: I spent about 15 min searching thru the EIA maze this morning looking for something like that.
BTW I believe most of the VMT reduction is due to unemployment not the price of fuel. Nice comment I concur. Most folks don't have a clue about the seriousness of the current situation. 2010 will provide the first results that folks will grasp that things are on a long downhill roll. But they will continue to keep on keeping on.
I had been following the doomers and peak oilers out there for a few years. Matt Simmons, Kunstler and Hubberts Peak all figured prominently. I think it telling as well, that as a group, we were bang on the money last year for the 2009 NYE price.
My barometer for price is based on:
Refiners around the world are clearly having a difficult time in dealing with heavier crude than they did before and that refinery market seems to be very uncertain at the moment. I like to use our Canadian tar sands as an extreme example of heavy crude refining. Almost incomprehensibly expensive. So financing is an inseparable part of that picture.
My pick: "Oil will close 2010 between $110 and $147"
But this time of year my crystal ball is rather foggy, so there is ample room for variance.
Best of the New Year to you all,
Nic
i am staying with my 1-1-09 wag: $75 +/- 10%
I already answered this question in another post. I vote oil will close at $70 - $90 dollars at the end of 2010 unless A major hurricane hitting a strike in the heart of offshore oil platforms in the gulf…, terrorism along a major pipeline or something like that…, War…, Somali Pirates manage to pull-off sailing away with an oil tanker (ok, maybe that one is far fetched)…, Americans begin to drive again like b4 the recession etc.
What can winners of this bet expect to receive from the Oil Drum???
I'll accept payment in Euros and barrels of oil.
:)
Although I punched in $70-$90, I'm having a hard time coming to grips with the question of futures.
If the question had been what will have been the average price at end 2010 I would be a little more confident of my vote.
I expect volatility with good and bad political and economic news. So far bad economic news is quickly supplanted with optimistic economic forecasts. If economic gloom begins to overwhelm the optimists, things can quickly deteriorate. Government propaganda machines have so far worked their magic.
The choice I wanted was something like "Oil will make new all time highs...but then crash back down to between $70 and $130."
Of course I'm really not sure if this will happen in 2010, but I think it's reasonable to expect it at some point in the next 1-3 years.
I expect 90-110$ on the basis that background geological depletion will be cancelled out by OPEC cutting back on its cuts to fuel the ongoing global recovery. I lean towards the upper part of the range.
My predictions for 2010 in detail - http://www.sublimeoblivion.com/2010/01/04/2010-predictions/