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Oil prices have climbed to their highest level ever, flirting with $120 per barrel. And consumers are feeling this price spike at the pump, with gasoline averaging $3.61 per gallon in the United States. An analysis released by the investment firm Goldman Sachs suggested that oil prices might soar to $200 per barrel. Does this make sense?
Not really. Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March 1993, notes Tim Evans, an energy futures analyst at Citigroup's Futures Perspective. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007, while world oil consumption rose by just 2 percent.
In fact, world production is projected to be 3.3 percent higher in the second quarter and 4.1 percent higher in the third quarter than the same periods a year ago. On the other hand, world demand is projected to rise by just 1.6 percent over the next six months.
In fact, demand is falling in some countries. According to economist John Kemp at the commodities firm Sempra Metals, the U.S. consumed 4 percent less petroleum in January 2008 than it did the year before. Evans agrees, noting that the U.S. demand for petroleum products began falling off last July.
Interestingly, this drop in U.S. oil consumption began before crude prices turned vertical and before we began to see weakness in the broader economy. Even China's thirst for oil is abating somewhat. Its demand for oil, which once rose at 10 percent per year, has now dropped to 6 percent per year. In addition, world surplus oil production capacity has gone from a very tight 1.5 million barrels per day a couple of years ago to more than 3 million barrels today, according to petroleum economist Michael Lynch.
So supply is up; relative demand is down. And yet the price of oil is soaring. What's going on? Exxon Mobil CEO Rex Tillerson just blamed a third of the recent run-up in oil prices on the weak dollar, another third on geopolitical uncertainty, and the rest on market speculation.
Let's start with geopolitical uncertainties. Last year, oil consumers watched warily as unrest in Nigeria's oil fields, the possibility of war between the U.S. and Iran, and the antics of Venezuela's Hugo Chavez threatened to disrupt oil supplies. That analysis may have once made sense, but most of those tensions have abated in recent months. Nevertheless, it remains true that most of the world's oil is produced in volatile regions and by erratic governments, so the price of crude must still include some kind of political risk premium.
What effect does the falling dollar have on the price of crude? Most oil price contracts are denominated in dollars. The dollar has fallen in value by more than 30 percent against a Federal Reserve index of major currencies since 2002. This means that the price of imports, including oil, has gone up. To some extent, the chief of the Organization of Petroleum Exporting Countries (OPEC), Chakib Khelil, was correct when he said earlier this week, "What's happening in the oil market is due to the mismanagement of the U.S. economy." Continuing U.S. trade and fiscal deficits along with lower interest rates are stoking inflationary fears.
That brings us to speculation. Evans observes that since September 2003, the total number of open crude oil futures and options contracts rose by 364 percent. Meanwhile the global demand for petroleum rose by just 8.2 percent. "So the futures and options market has become more important than the physical supplies in driving the price," concludes Evans. "We are seeing investment flows into the oil market that don't have anything to do with the demand and supply of oil."
Investors are treating oil as a hedge against inflation and a falling dollar. Oil markets are part of a negative feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth. In other words, the oil market is coming to resemble the gold market (which has also been soaring). Evans notes that most gold traders don't even ask the question of how much gold was mined last year or how much spare gold mining capacity there is.
In the short run, oil prices are very inelastic: a large change in price produces only a small change in demand. If the price of gas goes up a dollar per gallon overnight, you still have to fill your tank to get to work. However, over the long run, consumers and producers respond to higher oil prices. For example, Americans are driving less and have switched to buying more fuel-efficient cars.
Higher prices also encourage innovation. Economist Richard Rahn from the Institute for Global Economic Growth believes battery technologies are improving so rapidly that the majority of cars sold in 10 years will be all-electric. This would certainly help drive down the price of oil. Supply is also inelastic- it takes a long time to do the exploration, drilling, and refining necessary to boost production in response to higher prices. This inelasticity of demand and supply means that petroleum prices are very sensitive to relatively small changes in either. This means that prices can fall as steeply as they rose.
Whenever market gurus start to babble that "this time it's different," as they did during the dot-com and the housing bubbles, that's a sure sign of danger in the market. Naturally, proponents of the peak oil theory claim that the recent run-up in prices is evidence that the end is nigh.
Evans responds, "Fears of peak oil are what this market has in common with the 1980s, not what is different." Recall that during the "oil crisis" of the 1970s when oil prices were as high as they are today, U.S. oil consumption declined by 13 percent between 1973 and 1983. The higher prices of the 1970s led eventually to an oil glut and prices fell to about $10 a barrel by 1986.
So what will happen to oil prices over the next few years? No one is predicting $10 per barrel oil. However, once the current bubble bursts, both Evans and Lynch believe that the price of crude will settle at around $60 to $70 per barrel in the next couple of years. "It's very hard to pinpoint just how long a bubble can expand before it breaks. Getting the timing right is not an easy matter," says Evans. But he adds, "I think this is the riskiest time since 1980 to be long in crude oil."
Downtown Charlottesville resident Ron Bailey is the science correspondent for Reason, America's magazine of libertarian thinking.
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The oil production figures you refer to includes non-conventional oil as well as conventional. This effectively masks the drop in conventional oil production. Mexico has peaked, the USA, Russia, China, North Sea, Kuwait and many more have oil peaked. The reality is that at best oil production will flat-line for a few years but then start to drop at an increasingly steep slope. Oil will be no where near $60-70 in the next couple of years as while some demand reduction can easily occur the abiltiy to get off the oil economy is difficult (think transport, incesticides, drugs, cloths, plastics etc etc). Still not convinced? consider:
consumption greater than oil discoveries since 1970's
90% of the planet has been assessed for oil reserves - so much so the alledged Brasillian discovery requires the oil company to drill through 6km of the earth's crust (including 2km of corrosive salt!)
Saudi's saying they will only increase oil production to 12.4m bpd having previously already dropped it to 15m bpd.
Russia admitting it will never produce more than 10m bpd. (we're running out of countires that are increasing their production....)
the result falling supply in the near future (even if you include non-conventional oil such as tar sands) irrespective of the oil price pushing up the price even more - until at some point read $300-400 real long-term demand destruction begins with the resultant implied welath tax on consuming countires - particularly the US which consumes 28 of the 85m barrels produced each day even though they have only 5% of the population...
Whoever wrote this essay is an idiot. Blind Freddy can see that demand from China and India due to urbanisation and dirt cheap cars will increase exponentially in the next 10 years... meanwhile production will continue to drop or stagnate at best.
As stated most of the explorable earth has been searched for oil, leaving only the sea beds. It will be a while before deep-sea oil reserves can be extracted at all, even at ten times the present cost of extracting terrestrial oil supplies.
Oil from sands will never bring down the price of oil because it is too expensive an operation to extract the oil. Australia has MASSIVE deposits of oil trapped in shale deposits in Central QLD that companies have been desperately trying to develop commercially for over 30 years, to no avail.
Anyone familiar with economic theory will know that the invisible hand will supply anything to the market if solvent demand exists. If oil runs low, they will just dig deeper. If oil runs out, they will make cars run on water or air or anything. Free market economics is even known to have conquered natural laws. So fear not: Cheap energy is an American birthright, and American creativity will do quite comfortable, thank you, without oil. You neednīt even think about it - the market will sort it out just by itself!
(The above is irony in case you wonder...)
"the U.S. consumed 4 percent less petroleum in January 2008 "
DUH - of course they consumed less. You can't consume what you don't have.
Conventional OIL peaked in May 2005 and has never recovered.
Get a grip
There's nothing like cherry picking your stats to make your point. Current inventories mean little to nothing in the context of peak oil. Projections of supply growth and consumption declines are offered without reference to the sources. Maybe current prices don't reflect on the ground realities, but that again says nothing about peak oil.
Interesting how it is the geologist who says peak oil is real, but the economist who holds that it is not. Who has better data, do you suppose?
This guy is spot on. The recent oil bubble has nothing to do with peak oil and everything to do with economic panic and speculation.
I am gonna puke if I hear more about the so called ravenous appetite of China and India. Their consumption is DOWN in 2008.
Of course peak oil will affect us but this ain't it.
The oil drum has a good article on whale oil peak.
http://europe.theoildrum.com/node/3960
Essentially peak oil follows a nice smooth curve, but the price does not. What peak oil means w.r.t the price is really a shift from price stability, to price instability. Periods of very high prices followed by crashes.
Mike
Just ... wishful thinking.
Pray for your wishes, may be God will be listening. It's your only hope to be right.
This is not the first speculative boom in oil nor will it be the last. If you oil won't crash this year I've got some tulips to sell you.
On CNBC today were some interesting comments from experts in regards to today's high oil price. One, it would appear that despite the high oil prices, global demand for oil is not reducing. Two, although there is surplus crude available, unfortunately it has a high sulphur content. (sour) It is a far more complicated and expensive process to refine sour crude as compared to fine crude. There is a global shortage of such sour refineries.
In other words, there is little than OPEC can do to bring down the price of oil. The world will just have to get used to high prices. I have actually known about this fact for some time, but it had been overlooked for so long that I thought it would never happen. Now that these astute observations are beginning to be made on mainstream media outlets, I am somewhat shocked. I am shocked because this pronouncement has come at a time of great economic uncertainty. The official timing of peak oil has come. But it has come at a time of slowing global economic growth.
The repercussion's of this unfortunate timing in 'Peak Oil' is severe. I would have expected in the normal course of events, that the exact moment in time when the 'goose was cooked' to coin a favorite euphuism, would have occurred in an upward cycle of booming times. In this instance, a cooling economy due to the rapid rise in oil prices would delay the inevitable. Future oil shortages and sky high energy prices.
In the current scenario, the gradual rise in oil prices has resulted in a period of false hopes, spurred on by a false sense of security and absolute denial of the reality of the situation. As the world slowly but surely adjusted to the reality of higher oil prices, (over the past several years) costs were slowly passed onto the consumer. Because the costs were at first able to be consumed without undue hardship, demand for oil hardly faltered from its upward direction. Meanwhile completely unrelated to rising oil prices, investment in the oil industry remained mute. Ongoing projects were completed; new oil discoveries savoured, but critical investment was rare. There was a risk that the rising use of alternative fuels like bio ethanol and diesel would compete with oil increase supply and bring down the price. (as well as tar sands and new technologies such as hydrogen and electricity)
It all adds up to the complete storm of unfortunate consequences. The perfect storm made complete by the rapid climate that was brought on by 'Peak Oil' in the first place.
Daniel...Daniel, is that you?
Excellent timing for this article. Oil just hit the wall a few minutes ago.
To Zigster:
Chinese production is down? Not according to the China Petroleum and Chemical Industry Association (CPCIA). In fact it was up 8% in the first quarter.
http://news.xinhuanet.com/english/2008-04/29/content_8075648.htm
China oil imports down in April YOY
Don't believe the hype
I've been offering the bet below for several years now to all the delusionals who say that there's no peak, and prices will be going right back down again very soon:
You, Ronald, put down twenty Euros. I'll put down a hundred. We buy certified gold bullion with the money at once. We leave the gold with a mutually-trusted escrow agent, for five years. We then allow him/her to decide whether its then generally agreed that global oil production has in fact peaked, and we're on the downslope, and whether the price per barrel then, adjusted for inflation/deflation, is actually higher than it is now. (It will be)
Following what's really happening, you know, in the REAL world, I've grown so confident in this bet that I'd gladly play for ten times the stakes, and offer even longer odds. But this is all I can afford.
The thing which really hacks me off is that none of the smart-alec hacks who publish the cornucopian fantasies such as Ronald's will ever take my bet. So far, not one of them has even had the courage to answer. And they'd only lose a piffling twenty Euros. But that's hacks for you: big mouths, small thingies.
Look at your surroundings. I find it is a much better measure of reality than sweating over figures. When I walk out my door I can see more cars on the road, more people hanging around shopping centres buying plastic crap shipped from half way around the world, more big box stores popping up further and further away from peoples homes, more fast food outlets, more obese lazy people in their motorised carts, more planes flying over head. Demand is increasing every single minute. If you go to www.worldometers.info you will see some real time figures to knock your socks off.
oil will settle around a hundred bucks a a barrel and gas will settle in the 3.00 range for regular. Wages will go up to compensate and so will the cost of anything that the people with oil wealth need. Any merchant will charge a higher rate to a richer client. That is simple economics. We will not be runnng out of oil anytime soon. At 100 bucks a barrel there is plnety of room for exploration or prosessing esser grades of crude and still make a profit.
We will change our habits. elemanetary Schools will become smaller and more local so all the kids can walk again. Telecommuting will become more popular. Houses will be redesigned to use less energy. There will be a huge market for upgrading older houses to use less fuel. You may even see fuel trucks deliver right to your home to avoid the middleman.
Cheap energy increased the standard of living in this country and it took oil to do it. If any other country could have done it as quickly as the US then they surely would have done so. We just did it first. don't feel guilty for enjoying the fruits of your fathers labor.
Look at it this way, the sooner all of the oil is gone (and the WORLD will burn every last drop without our help) the sooner fossil fuels will stop heating the planet and all the tree huggers will be able to relax and enjoy the cooling trend.
peak oil? so frigging what.. thats like worrying because your gas guage reads to the left of half. If your only 50 miles from your destination and half a tank gets you 150 miles then it matters not. You will have plenty of time to find a station in time.
We will adapt, it is called "evolution".
Oil is finite. When it "runs out" is immaterial. The fact is that the era of CHEAP OIL is at an end. Many posters have commented that the free market will solve the problem. Well, what about death? People have been dying for a long time yet there is no immortality pill, despite a huge demand from Adam Smith's invisible hand. It's possible that the market will solve this problem. Then again, it's possible that it won't.
The US government has long ignored renewables and they are only competitive as subsidies. Not seeing the end of cheap oil as a problem is a fallacy. There will never be $60 or $70/barrel oil again. Live with it.
When does economics ever solve any problems. It's just an attempt to explain social issues. Higher oil means fewer people/countries will be able to afford it according to economics. The reality depends on what countries decide to do. It doesn't seem very wise to send it to the U.S. for dirt cheap.
Coming from a "science correspondent for the Reason magazine" the author displays an incredible
lack of scientific knowledge and reasoned
argument. Almost everything is based at best on
the perspective of a typical neo-liberal
economist, and at worst on faith-based wishful
thinking.
The problem is that the perspective of the economist - that of ever increasing growth in supply, technological innovation to overcome serious shortfalls, etc. - can work only
within the constraints placed by the physical world.
For example, there is such a concept as Energy
Return on Energy Invested (EROEI) which measures
the energy gain obtained when we extract any energy source. If the EROEI is close to one or
less, then exploiting that energy will not provide
any net energy gain to society. An example is
corn based ethanol where the best EROEI measured
so far is around 1.4 (many say that it is less than 1). Compare that to the EROEI of currently
produced conventional oil - about 20-30
and that of a century ago - about 100 and we see
how different the energy landscape of the future
would be if current trends continue.
Thus for some very basic physical and
thermodynamical reasons (and also economic
reasons), increasing production or improving the efficiency of our current systems faces extreme
difficulty. By all accounts the difficulty levels
will only rise due to increased oil prices i.e. moving the world towards a low oil-dependent and
efficient system will become less likely with increasing oil prices.
From this perspective there is lot to be concerned
about and a lot less to be hopeful about than what
the article would have us believe. Its limited perspective means that this article does a clear
disservice to the very important issue it
addresses.
Seriously, where is the science or the reason in
this article?
China's appetite for cars is ravenous, to say the least. They want what America has been enjoying for the past 40 years, and rightfully so. But at what price to their own health and the environment?
China's Car Boom Tests Safety, Pollution Practices
http://news.nationalgeographic.com/news/2004/06/0628_040628_chinacars_2.html
and India is going ga-ga over the Tata (World's cheapest car) - all Indians can now get one!
http://www.downtoearth.org.in/cover.asp?foldername=20071015&filename=news&sid=42&sec_id=9
Yeah... SURE oil will get cheaper... get off your seat and look around. It wouldn't be pretty if it did, either - would make all problems many times worse than they are now!
High oil prices are a wake up call
-One factor not mentioned- in talking about world oil consumption- the word consumption is assumed to refer to actual use- it strictly refers to oil that is bought- a lot of which is put in reserves-
a small percentage compared with actual use- but it seems the tightness of those margins really swings the price.
Oil is a good economic story- the world is prospering at a greater rate than anticipated- the US looks to be not going into recession- this increases demand for all commodities. if oil was the only commodity becoming more expensive- that would provide a better argument for peak oil,
expensive wheat is not a sign of 'peak wheat'.
Meanwhile the high prices are good for some great American oil service companies that recently struggled under low prices.
I think the practical bottom line is that it's a great time to shop around for an RV or large powerboat etc- before the oil market gets swamped again- as for Co2 emissions- we can offset by staying calm and not breathing too heavily!
www.readthehook.com