The Hook - ESSAY- No peak: Why oil prices will fall again

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ESSAY- No peak: Why oil prices will fall again

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Published May 15, 2008 in issue 0720 of the Hook

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 recently, "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.

Comments

Smudger5/15/2008 8:38:40 AM 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...
Russell Savige5/15/2008 9:11:24 AM 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.
Poul Andreasen5/15/2008 9:51:51 AM 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 needn´t even think about it - the market will sort it out just by itself! (The above is irony in case you wonder...)
Sean5/15/2008 9:54:51 AM "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
Shaman5/15/2008 10:31:23 AM 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.
Jumpingoffthepeak5/15/2008 10:39:02 AM 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?
Zigster5/15/2008 10:42:18 AM 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.
Mike5/15/2008 10:59:13 AM 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
Marcel5/15/2008 11:01:39 AM Just ... wishful thinking. Pray for your wishes, may be God will be listening. It's your only hope to be right.
Zigster5/15/2008 11:43:53 AM 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.
Ian5/15/2008 12:14:01 PM 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.
RINX5/15/2008 1:02:40 PM Daniel...Daniel, is that you?
Smegma5/15/2008 1:11:42 PM Excellent timing for this article. Oil just hit the wall a few minutes ago.
Shaman5/15/2008 1:24:53 PM 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
Zigster5/15/2008 3:33:33 PM China oil imports down in April YOY Don't believe the hype
Rhisiart Gwilym5/15/2008 5:42:37 PM 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.
Turnpike5/15/2008 8:40:59 PM 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.
jed clampett5/15/2008 10:35:29 PM 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".
Brandon5/16/2008 12:59:25 AM 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.
gus' friend5/16/2008 2:15:30 AM 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.
Vinny Kuper5/16/2008 2:25:54 AM 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?
Ted Ollikkala5/16/2008 6:52:10 AM 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&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
Steve L5/16/2008 12:23:55 PM -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!
Zigster5/16/2008 2:37:57 PM when the US economy is improving the speculators point to increased US demand for oil and raise their bids when the US economy worsens the speculators point to a weakening dollar and raise their bids this is a sure sign of a bubble
Brandon5/16/2008 8:09:10 PM I find it interest how so many people can profess to "know" about the peak oil situation. OPEC's reserve numbers have not changed since the 1960s. No Western company can measure OPEC reserves. The only thing we know for sure is that oil is finite and will eventually peak (conventional or unconventional oil is finite). When that will happen is uncertain. The only problem I have with this article is that it talks about oil settling at $70 or $60 a barrel in a "couple of years," which is outrageously inaccurate. Just because oil prices drop does not mean that there isn't a peak. The prices will drop, but the plateu price will be higher than the previous drop. That is, the overall trend will be upward. Seriously though, I question how this article is even published. Furtures for oil is at more than $124/barrel right now. The decrease predicted by this author is so dramatic for a world economy with anemic alternatives for oil (not to mention natural gas and natural gas liquids). Also, what's the deal with the author's comment that "relative demand is down?" Peak oil has never been concerned with short-term demand fluctuations. It's all about a long-term increase in oil consumption. The author also talks about how "supply is up." Spare production capacity does not mean supply is higher. Every time you pump oil, supply goes down as oil is finite. Spare production capacity would have no or a tenuous link to peak oil.
thetarminator5/16/2008 9:12:48 PM Tim Evans is the biggest joke in the world of oil. Just google his name and check the archives as well for his time tested masterful predictions. Complete doofus!
Sean 5/16/2008 11:50:08 PM Please - To All of you a-holes who believe that market speculation and the huge influx of cash into the commodities market isn't driving up price. You said the same about the housing market, and the dot-com boom. Once again, basic market fundamentals are being completely ignored, and the NYMEX is being treated like a cheap casino, at the expense of everyone, and our nations economy. Zigster (posted above) hit the nail on the head, any excuse is being used to push the price of oil. Is the world using that much more oil, that it justifies a 100% increase in price over a little less than a year? Surely that would mean that the planet is using double the amount than a year ago? Are we using that much more oil globally than a year ago when prices were in the $70 range? Goldman Sachs trots out their new predictions, and boom, the price goes up. They fail to mention that they are one of the biggest traders in oil futures, and energy. Why wouldn't they offer their predictions? It pays millions every time they do. And the market responds like a bunch of sheep. "Goldman Sachs speaks - oooooh" Ok, I agree that as "emerging markets" consume more oil and as they try to imitate the american lifestyle oil consumption will go up but at its current price, it is completely oversold. This market is completely crazy, panicked, unrealistic, and besides itself at this point. The bulls are having free reign, and loving every minute of it - fundamentals are being completely ignored. The "mellodrama" of the media doesnt help either. Phrases like "oil prices SOAR $1 today" or nice words like "plummet" "skyrocket" "record heights" add to the drama. And we all suck it up. Case and point: Today President bush flies Saudi Arabia to meet with members from OPEC and prices shoot up over $2.50 per barrel - Just on the basis of him being there, up goes the price. What does that tell you? Why do you think OPEC is reluctant to pump more? They know what is driving the market, specualtion. If they dump a bunch of oil into the market place, crash goes the price, and they lose millions. Surely it would be in their best interest to pump as much as they can at $126 per barrel? On wednesday the price dropped to the $122 range, because "China had a big earthquake and there was large prediction that their demand would drop." Today the story is that "oh yeah, now they need more diesel fuel because of the earthquake" and up goes the price again. Every day is a different reason. If you dont believe that commodities have become a cheap hedge fund you need to rethink your position. More evidence: The dollar weakens - traders buy crude as "a hedge against a weak currency" The price of oil weakens - traders buy oil because its "on sale" Where is the end to the cycle? And we wonder what it driving up the price. Ok, I agree the days of cheap $20 oil are likely gone. And we are all a bunch of dumbasses for having entire legions of soccer moms driving around Lincoln Navigators at 14mpg. We are addicted to this black crap we buy from people who hate our way of life - yet love the color of our money. Environmentalist wack-jobs and our cocked up inflated government have stopped us from using our own oil. Hey, I'm all about conservation, that is why every light bulb in my house has been replaced with a CFL, and we keep the thermostat low. I drive the speed limit, and get 10% more fuel economy (Try it, it works) And no, I will never own a 325hp SUV. If they sold electric cars, I would buy one for my wife who drives 6 miles to work. But the likely truth is that the market for oil is waaay overheated and due for a correction. I hope there are a lot of those trading paper oil that are going to feel a world of pain when the sell-off starts. And it will sooner or later. Read this http://www.domainb.com/industry/oil_gas/20080425_oil_boom.html
Ted Ollikkala5/17/2008 2:12:36 AM tarminators link (above) should be: http://www.domain-b.com/industry/oil_gas/20080425_oil_boom.html A small ray of hope, tarminator... a few more oil discoveries are announced; but the problem does not go away. It's merely offset a few years. Have you got anything against initiating measures to wean the entire American economy off oil? (And the world, for that matter). Don't miss the main point: Dependence on fossil fuels is suicide for civilization. http://declineusa.wordpress.com
Ted Ollikkala5/17/2008 2:26:03 AM Correction, it was Sean's link. To provide further support for the price rise scenario, here's what State Rep. Terry Backer, co-founder of the Connecticut Peak Oil and Natural Gas Caucus and a member of the General Assembly's Energy and Technologies Committee has to say: There is little government can do about the price of oil. That is not what people want to hear. Yet it is a fact. The U.S. government and all the states have no "Plan B." They continue to rely on a delusional "Plan A" — more oil and cheaper oil all the time. Politicians, generally asleep at the wheel on this issue, have been shocked into trying to do something about the current and future problems arising from oil costs. They are spinning around looking for someone to blame, dazed by the precipitous rise from $50 per barrel last January to $126 this past week. In an election year, members of Congress are beating the bushes trying to escape the fallout of their years of dozing in their seats. They point at speculation, greedy profit takers or big oil companies, perhaps all true to one extent or another. However, despite the rising chorus of voices pointing out rising demand coinciding with falling or flat production, they seem to be ignoring the 800-pound gorilla in the room that is "Peak Oil" production. Just a few years ago, Mexico, Russia, Norway, England and Indonesia were producing vast amounts of oil for the world market. Today, England and Indonesia are net importers of oil, Russia's production is flat, Norway's production is falling and Mexico has informed us that their giant oil field, Canterall, is in terminal decline and may not be able to export after 2015. entire article: http://www.connpost.com/ci_9286142 (Aside: I can't help notice that the article is being sponsored by a car manufacturer... Ford!)
salz5/17/2008 7:48:06 AM Every decade the US Geologic Survey does a "World Petroleum Assessment" of which one outcome is that geologists predict when "The Big Rollover" comes (usually called Peak Oil). The conscensus from the 1990 Petroleum Assessment was about 2050. From the 2000 WPA, the conscensus became 2007 and no geologists predicted it any later than 2020. Instead of the short-run thinking that Mr. Bailey exposes, we must begin considering longer-term thinking if this country can survive the slow-moving economic, social and political disasters predicted by The Big Rollover/Peak Oil and Global Warming. As he no doubt knows, demand always "corrects" after a large price increase in the short-run. IN the long-run, however, only by producing substitutions for our drive-first default position will we ever deal with our problems. Those substitutions ususally take decades to build -- witness the quarter century Tyson's Corner metro debate -- before oil usage can truly increase in elasticity. America's usage of oil is the ultimate example of "market failure" and when one considers the disturbing possibilities inherent in Peak Oil and Global Warming issues, waiting for the market to correct itself -- as people as diverse as Charles Maxwell, the energy guru, Robert Franks, the NY Times economic columnist, and even automakers like William Ford IV have said -- will be waiting too long. Mr. Bailey, furthermore, fails to understand one crucial concept in his market first perscription. America owns about 226 million cars and trucks of which almost all run on gasoline and diesel today. If suddenly, somehow, there were vehicles which did run on water/hydrogen/biofuels and IF they were produced in enough numbers and IF there were logical places to stop and service such vehicles, there is immense value in the vehicles we already own. Will we throw all that value into the junk yard? Traditionally, America turns over our vehicles about 8 percent a year. In the seven years the Intergovernmental Panel on Climate Change now says we have to stabalize C02 emissions before threatening one quarter of all species on the planet, we will turn about half of our cars -- and most of the new vehicles will still burn gas/diesel and still emit pollutants, including C02, IF perhaps not as much. I wouldn't bet on Mr. Bailey's hopeful analysis.
Sean 5/17/2008 10:13:51 AM Ted, Thanks for the correction. I do agree with the opinion that we need to get off of our dependance on oil - particularly from foreign markets. Perhaps the shock we are now feeling is going to wake this country up. We are so used to using everything in excess in America. I do believe that the free market will take care of itself, and government "intervention" and politics make matters even worse. This summers driving season is going to be shot and eventually the price of fuel is going to force us into smaller more efficient vehicles. We should have been driving diesel powered cars years ago. Why? The diesel engine is 30-40% more efficient than a gasoline engine. I know this because I work in the industry. The europeans have known this for 20 years. The volkswagen rabbit (diesel) powered got 40-45 miles per gallon in the early 80's! Why aren't we driving more electric vehicles? Because oil at $20 didn't make it worthwhile. GM made a bunch of these in the 90's and they were taken off the market because oil companies crushed the idea. Ever see the documentary "who killed the electric car?"
thetarminator5/17/2008 2:53:06 PM Anybody have any real data out there like: How many $B does it take to get 100,000bpd out of the oilsands? What's the daily cost of a deep water drill rig? What is the success rate of exporation drilling? How much does it cost to build a new refinery (even if some non-nimby lets you)? I bet if you answer those questions you'll find the answer to why oil is up.
anaconda5/18/2008 12:54:29 AM The one issue the Peak advocates failed to grasp in this thread was the existence of deepwater, deep-drilling. Sure, one gentleman referred to the alleged Brazilian find. But it's not just alledged, it's real enough that Brazil's Petrobas has contracted 80% of the deepwater oil rigs. The geologic formations this oil has been found in are repeated all over the world. And the finds are huge themselves. America has a virgin area called the Carolina Trough off the East coast, about the size of the state of South Carolina. The area is similiar to the area of Brazil's coast. Oil is being discovered all over the world. Many countries like Mexico and Indonesia let their oil industry fall off with poor investment. That's starting to change, at least in Indonesia. Oil exploration and production from just beyond the continental shelf has the potential to satisfy the world's need for oil. Check out the blog Oil Is Mastery for deepwater oil exploration information.
5/18/2008 1:06:41 AM Sean - OMG, thanks so much for the tip on 'who killed the electric car'!!! I've posted an article on my blog about it http://declineusa.wordpress.com/2008/05/18/who-killed-the-electric-car-sonypictures-documentary-2006/
jim5/18/2008 6:26:37 AM @ anaconda Do you believe in Santa Clause as well? Abiogenic oil is a pipe dream. If oil wasn't exactly what geologist believe it is then they would not have had as much success at finding it over all of these years. It exists where they drill because they know what it is and where it collects. But, let's play along for just a moment. Suppose there is oil being made perpetually at the earths core. Do you think it will be as cheap to get it as it is the free flowing stuff we have previously found? That is the problem isn't it? Oil is expensive? Not that there isn't any more oil but that it is way more expensive to recover it now, right? How is drilling through miles of earth and ocean going to bring the cost of a barrel of oil back down to the $10 it was only 10 years ago? Not to mention the cost in energy that it takes to undertake such drilling procedures. Every once of our resources going forward, mental, physicaland financial needs to be concentrated in finding a clean, renewable alternative to oil.
Ted Ollikkala5/18/2008 8:46:51 AM @anaconda Assuming we can find plenty of oil to satisfy the world's demands; If we keep right on using oil the way we've been using it in the past, what's gonna happen to the earth's atmosphere? As Ted Turner put it recently on Charlie Rose (April 1 2008), there won't be any humans left to ask the question. Global Warming, droughts, inability to grow crops, severe food shortages, and eventual resource wars will lead to collapse of civilization. And the trigger was emissions from burning fossil fuels. Ted Turner was absolutely adamant that our nation's top priority after eliminating nuclear weapons is to find a sustainable, renewable source of fuel. Finding more oil just digs the hole deeper for all of us. In fact, the Saudis are smarter than we are: they're leaving some in the ground for their grandchildren.
LAW7575/18/2008 9:55:51 PM The Peak Oil problem we now face is a very complex one that is resistant to the analysis of arm chair philosophers like Mr. Bailey. I take issue with many of Mr. Bailey’s points but for brevity I would like to address just one. The Devil is in the details. Mr. Bailey states, “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.” Energy Analyst, Tom Whipple at the “Falls Church News Press”, makes the following point in paragraph 3 of his most recent 15 May 2008 article, “The Peak Oil Crisis: Diesel” found here http://www.fcnp.com/national_commentary/the_peak_oil_crisis_diesel_20080515.html, “The reasons for this surge in distillate prices are easy to understand. Conventional oil production, from which distillates are made, has been flat for the last three years while demand from Asia and the Middle East oil producers has been rising rapidly. The trend into higher-mileage diesel powered cars in Europe and other places, which has been underway for many years, is having a major impact. In some European countries, diesels now account for over 70 percent of new car registrations. This change in demand is leaving Europe and a few Asian refiners with a surplus of gasoline but not diesel. The overseas refiners are happy to sell their surplus gasoline to America which still wants prodigious quantities of the stuff. This, believe it or not, helps keep gasoline prices lower than the price of crude suggests it should be, as unusual quantities of gasoline keep arriving at our shores.“ Tom Whipple FCNP. It seems to me that the current high US gasoline inventories that Mr. Bailey takes such solace in, are due to the result of the reallocation of an existing resource not the excess capacity of that same resource in total. This is dangerous because guys like Mr. Bailey are using the excuse that we have plenty of gasoline to postpone the hard decisions we all must ultimately face. Everyday we delay will make it that much harder on us when the time comes when we have no choice but to face the music. I stand with many others who are saying that this time the Wolf really is at the door.
DunlapBelly5/20/2008 12:28:56 PM A big ho hum. I drive 7 miles to work or 14 miles a day. I live where I want to live and don't vacation much. So even if gas goes to $7.00 a gallon, I will still drive my smoldering 96 Jeep which gets 20 mpg because IT IS PAID FOR! So what if it costs me $4.90 to go back and forth to work a day? I piggy back the grocery store, post office, and errands and always have. My next car will be a small hybrid with flex fuel capacity no matter what oil does. I do think that the weak dollar and speculation are driving this bubble and a crash is going to happen, just like HOUSING bubble and just like the 2001 Stock Market bubble, this one is going to leave a lot of LONGS broke. Timing is everything, but I think the shorts will win soon.
vivek5/20/2008 4:53:59 PM I think the high price of oil will cause a severe economic slowdown -- and this will bring the price of oil down. Of course, it is not possible that the oil price goes up to $200 and goes up and up and up. Businesses/Customers are paying for this and sooner or later the buying power will come down and there will be bankrupcies. At that point (with demand crashing) the oil price will come down.
LAW7575/20/2008 7:20:02 PM Oh Hum, might not be so sanguine if he did no have enough food to eat. There are two nations who have suffered through a PEAK Oil transition, Cuba and North Korea. Two years after the Berlin Wall fell in 1989 Russia turned off the oil to Cuba and North Korea. North Korea’s agricultural system failed and millions of North Koreans starved. Cuba successfully made a transition to post industrial agriculture and local food growing system which has a lot to teach us Norte Americanos. The Cubans have a lot to teach us about growing food. Watch: Urban Food Growing in Havana, Cuba http://youtube.com/watch?v=jRz34Dee7XY&feature=related It is estimated that it takes 10 calories of energy (from oil) to produce 1 calorie of food. We now rely on the infamous 1200 mile salad; we no longer eat local. By about 1960 all the world’s naturally arable land was under cultivation. Starvation was predicted but along came the Green Revolution which is made up of two components. One is genetically modified plants that offer higher yields; the other was the wide adoption of oil based fertilizers, pesticides and industrial farming techniques (tractors, combines etc). During the 19th century 30 bushels of corn were produced from one acre of land. Today we grow 160 bushels of corn on that same land. Industrial farm machinery and industrial fertilizers make this possible. There are 30,000 corn plants on an acre of land. If you hand plant an acre with a sharp stick placing one seed every 5 seconds working around the clock it will take you 173 days to plant that field. Farm tractors powered by diesel fuel can plant our field in a few hours. There are 1.3 million wheat plants planted per acre. Imagine hand planting a wheat field or the state of Kansas by hand. A 2 pound box of cornflakes requires the energy equivalent of ½ gallon of oil to produce. Timothy McVeigh was a man who understood the power contained in the fertilizer we use to grow our food. There is a tortilla food crisis in Mexico, a Pasta crises in Italy, food costs are raising dramatically world wide. I can recommend the following article from Harper’s Magazine. "The Oil We Eat: Following the food chain back to Iraq" By Richard Manning http://www.harpers.org/archive/2004/02/0079915 Driving to work will soon be the least of our problems.
Sean 5/21/2008 7:28:31 PM I have now come to the complete conclusion that the run up in oil has very little to do with fundamentals and everything to do with the huge influx of cash and investment into the commodities market, especially oil. I am in sales and while on the road I have sirius radio tuned into CNBC all day. The correspondent at the NYMEX today reported that at one stage she could hear traders yelling "GO! GO! GO!" as the price per barrel was ticking up over $133 per barrel, and I quote. Boone Pickens decides yesterday to give his prediction of $150, and the price today jumps over $4. No surprise that he is an oil speculator who has made millions in this market Michael Masters, a well respected hedge fund manager, for Masters Capital Managemet testified before a Senate Committee hearing today "[Commodities] are experiencing demand shock from a new category of speculators: institutional investors like corporate and government pension funds, university endowments, and sovereign wealth funds," Also"Index speculators are the primary cause of the recent price spikes in commodities" Proof: "Michael Masters of Masters Capital Management LLC says that China is not responsible for increased oil prices since, over the past five years, the increase in demand by market speculators is nearly equal to the increase in Chinese demand" Did you read that right? The increase in demand from market speculators is NEARLY EQUAL TO THE INCREASE IN CHINESE DEMAND" Conclusion - there has been a complete disconnect from any fundamentals, and the market is now in a state of "mania" When you have this situation, you have, and lets all say it together "a huge bubble" Investors are now frantic to get in any way they can. Welcome to the gold rush of the new millennium. Where does it stop? As long as these a-hole trades keep pouring in the cash, and they all keep propagating their fear and belief that the sky will fall tomorrow and we are all going to die - God only knows. I hope it bursts soon, and I hope it hurts them like hell. Soon, these guys are going to get some very bad press. Congress now has them in the crosshairs, and the public who are paying for this rally are going to get very annoyed at $6 per gallon. World dema
Larry5/21/2008 7:31:09 PM The free market will solve this problem. But who says it has to solve it with oil materialized out of thin air. The real commodity is energy not oil. I predict a shift to electricity as the main energy commodity of the future. Inputs to the grid from solar thermal and wind, outputs to electric transportation (freight, transit, cars). Even if infinite oil was available, at some point the cost of recovery exceeds the cost of alternative energy sources.
Ian5/23/2008 12:43:43 AM Wishful thinking aside, at least I tried to tell you the truth. I am wise enough to know the dreaded truth about one’s life. Most of it is entirely out of your control and in the hands of your political leaders. It is nice to think otherwise, but sadly life experience proves otherwise. If you so happen to have views that lie in the minority, or against elected authorities, then you run the risk of your views being overlooked, or even unheard. This is called political expediency. For example; I personally would be aghast at the current economic situation facing New Zealand. However I admit my views are biased. I believe in the likelihood of extreme Climate Change brought on by excess Man made greenhouse gas emissions, and peak oil. I admit that I have also researched heavily into both sides of the argument. I admit that I am not a believer in these unfortunate scenarios because I am casually biased in favour of them. I am a believer because of much research, studying recent climate trends, and over whelming scientific evidence. Not to mention the undeniable facts. Oil is currently over $130 per barrel. There is no good reason for this high price apart from oil demand exceeding oil supply. Peak oil has arrived except no-one wants to say it officially. Suffice to say, you know things are getting serious when the IEA makes the following statement yesterday: The International Energy Agency, whose forecasts of world energy supply are perhaps more influential than any other, has expressed deep concerns that the world's oil supply can no longer meet demand. In other words, that peak oil may be here.
Alan5/30/2008 10:49:07 PM The higher oil prices go,the less consumers are going to buy.Not just because they don't want to buy fuel at such high prices,but simply one will not be able to afford it at all.With that, the demand for fuel plummets.So I say to the rich and greedy oil companys,keep blowing your balloon,it will burst on you very SOON.
Johnson10/17/2008 1:48:59 AM I think Mr Bailey either understands the economy so well or is very good at making prediction and inferences. Mr Bailey obviously has a true understanding of how the demand and supply forces work tegether and his statistical evidence has led to a spot on evaluation of the true economic situation. For your information I am a Nigerian and you should go check the Oil Prices now. To all of you short sighted people, I think you should delete your useless posts that lack foresight and indept economic analysis. Thank you Mr Bailey and please continue to educate us on the trends you find in the economy
Zigster12/23/2008 3:59:37 PM Always fun to revisit this prescient article and read the comments, both intelligent and idiotic

Smudger5/15/2008 8:38:40 AM

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...

Russell Savige5/15/2008 9:11:24 AM

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.

Poul Andreasen5/15/2008 9:51:51 AM

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 needn´t even think about it - the market will sort it out just by itself!

(The above is irony in case you wonder...)

Sean5/15/2008 9:54:51 AM

"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

Shaman5/15/2008 10:31:23 AM

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.

Jumpingoffthepeak5/15/2008 10:39:02 AM

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?

Zigster5/15/2008 10:42:18 AM

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.

Mike5/15/2008 10:59:13 AM

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

Marcel5/15/2008 11:01:39 AM

Just ... wishful thinking.

Pray for your wishes, may be God will be listening. It's your only hope to be right.

Zigster5/15/2008 11:43:53 AM

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.

Ian5/15/2008 12:14:01 PM

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.

RINX5/15/2008 1:02:40 PM

Daniel...Daniel, is that you?

Smegma5/15/2008 1:11:42 PM

Excellent timing for this article. Oil just hit the wall a few minutes ago.

Shaman5/15/2008 1:24:53 PM

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

Zigster5/15/2008 3:33:33 PM

China oil imports down in April YOY

Don't believe the hype

Rhisiart Gwilym5/15/2008 5:42:37 PM

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.

Turnpike5/15/2008 8:40:59 PM

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.

jed clampett5/15/2008 10:35:29 PM

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".

Brandon5/16/2008 12:59:25 AM

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.

gus' friend5/16/2008 2:15:30 AM

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.

Vinny Kuper5/16/2008 2:25:54 AM

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?

Ted Ollikkala5/16/2008 6:52:10 AM

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&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

Steve L5/16/2008 12:23:55 PM

-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!

Zigster5/16/2008 2:37:57 PM

when the US economy is improving the speculators point to increased US demand for oil and raise their bids

when the US economy worsens the speculators point to a weakening dollar and raise their bids

this is a sure sign of a bubble

Brandon5/16/2008 8:09:10 PM

I find it interest how so many people can profess to "know" about the peak oil situation. OPEC's reserve numbers have not changed since the 1960s. No Western company can measure OPEC reserves. The only thing we know for sure is that oil is finite and will eventually peak (conventional or unconventional oil is finite).

When that will happen is uncertain.

The only problem I have with this article is that it talks about oil settling at $70 or $60 a barrel in a "couple of years," which is outrageously inaccurate. Just because oil prices drop does not mean that there isn't a peak. The prices will drop, but the plateu price will be higher than the previous drop. That is, the overall trend will be upward.

Seriously though, I question how this article is even published. Furtures for oil is at more than $124/barrel right now. The decrease predicted by this author is so dramatic for a world economy with anemic alternatives for oil (not to mention natural gas and natural gas liquids). Also, what's the deal with the author's comment that "relative demand is down?" Peak oil has never been concerned with short-term demand fluctuations. It's all about a long-term increase in oil consumption. The author also talks about how "supply is up." Spare production capacity does not mean supply is higher. Every time you pump oil, supply goes down as oil is finite. Spare production capacity would have no or a tenuous link to peak oil.

thetarminator5/16/2008 9:12:48 PM

Tim Evans is the biggest joke in the world of oil.

Just google his name and check the archives as well for his time tested masterful predictions.

Complete doofus!

Sean 5/16/2008 11:50:08 PM

Please -

To All of you a-holes who believe that market speculation and the huge influx of cash into the commodities market isn't driving up price. You said the same about the housing market, and the dot-com boom. Once again, basic market fundamentals are being completely ignored, and the NYMEX is being treated like a cheap casino, at the expense of everyone, and our nations economy.

Zigster (posted above) hit the nail on the head, any excuse is being used to push the price of oil. Is the world using that much more oil, that it justifies a 100% increase in price over a little less than a year? Surely that would mean that the planet is using double the amount than a year ago? Are we using that much more oil globally than a year ago when prices were in the $70 range?

Goldman Sachs trots out their new predictions, and boom, the price goes up. They fail to mention that they are one of the biggest traders in oil futures, and energy. Why wouldn't they offer their predictions? It pays millions every time they do. And the market responds like a bunch of sheep. "Goldman Sachs speaks - oooooh"

Ok, I agree that as "emerging markets" consume more oil and as they try to imitate the american lifestyle oil consumption will go up but at its current price, it is completely oversold.

This market is completely crazy, panicked, unrealistic, and besides itself at this point. The bulls are having free reign, and loving every minute of it - fundamentals are being completely ignored. The "mellodrama" of the media doesnt help either. Phrases like "oil prices SOAR $1 today" or nice words like "plummet" "skyrocket" "record heights" add to the drama.

And we all suck it up.

Case and point: Today President bush flies Saudi Arabia to meet with members from OPEC and prices shoot up over $2.50 per barrel - Just on the basis of him being there, up goes the price.

What does that tell you? Why do you think OPEC is reluctant to pump more? They know what is driving the market, specualtion. If they dump a bunch of oil into the market place, crash goes the price, and they lose millions. Surely it would be in their best interest to pump as much as they can at $126 per barrel?

On wednesday the price dropped to the $122 range, because "China had a big earthquake and there was large prediction that their demand would drop."

Today the story is that "oh yeah, now they need more diesel fuel because of the earthquake" and up goes the price again.

Every day is a different reason.

If you dont believe that commodities have become a cheap hedge fund you need to rethink your position. More evidence:

The dollar weakens - traders buy crude as "a hedge against a weak currency"

The price of oil weakens - traders buy oil because its "on sale"

Where is the end to the cycle? And we wonder what it driving up the price.

Ok, I agree the days of cheap $20 oil are likely gone. And we are all a bunch of dumbasses for having entire legions of soccer moms driving around Lincoln Navigators at 14mpg. We are addicted to this black crap we buy from people who hate our way of life - yet love the color of our money. Environmentalist wack-jobs and our cocked up inflated government have stopped us from using our own oil. Hey, I'm all about conservation, that is why every light bulb in my house has been replaced with a CFL, and we keep the thermostat low. I drive the speed limit, and get 10% more fuel economy (Try it, it works) And no, I will never own a 325hp SUV. If they sold electric cars, I would buy one for my wife who drives 6 miles to work.

But the likely truth is that the market for oil is waaay overheated and due for a correction. I hope there are a lot of those trading paper oil that are going to feel a world of pain when the sell-off starts. And it will sooner or later.

Read this

http://www.domainb.com/industry/oil_gas/20080425_oil_boom.html

Ted Ollikkala5/17/2008 2:12:36 AM

tarminators link (above) should be:

http://www.domain-b.com/industry/oil_gas/20080425_oil_boom.html

A small ray of hope, tarminator... a few more oil discoveries are announced; but the problem does not go away. It's merely offset a few years. Have you got anything against initiating measures to wean the entire American economy off oil? (And the world, for that matter).

Don't miss the main point: Dependence on fossil fuels is suicide for civilization.

http://declineusa.wordpress.com

Ted Ollikkala5/17/2008 2:26:03 AM

Correction, it was Sean's link.

To provide further support for the price rise scenario, here's what State Rep. Terry Backer, co-founder of the Connecticut Peak Oil and Natural Gas Caucus and a member of the General Assembly's Energy and Technologies Committee has to say:

There is little government can do about the price of oil. That is not what people want to hear. Yet it is a fact. The U.S. government and all the states have no "Plan B." They continue to rely on a delusional "Plan A" — more oil and cheaper oil all the time.

Politicians, generally asleep at the wheel on this issue, have been shocked into trying to do something about the current and future problems arising from oil costs. They are spinning around looking for someone to blame, dazed by the precipitous rise from $50 per barrel last January to $126 this past week.

In an election year, members of Congress are beating the bushes trying to escape the fallout of their years of dozing in their seats. They point at speculation, greedy profit takers or big oil companies, perhaps all true to one extent or another. However, despite the rising chorus of voices pointing out rising demand coinciding with falling or flat production, they seem to be ignoring the 800-pound gorilla in the room that is "Peak Oil" production.

Just a few years ago, Mexico, Russia, Norway, England and Indonesia were producing vast amounts of oil for the world market. Today, England and Indonesia are net importers of oil, Russia's production is flat, Norway's production is falling and Mexico has informed us that their giant oil field, Canterall, is in terminal decline and may not be able to export after 2015.

entire article:

http://www.connpost.com/ci_9286142

(Aside: I can't help notice that the article is being sponsored by a car manufacturer... Ford!)

salz5/17/2008 7:48:06 AM

Every decade the US Geologic Survey does a "World Petroleum Assessment" of which one outcome is that geologists predict when "The Big Rollover" comes (usually called Peak Oil). The conscensus from the 1990 Petroleum Assessment was about 2050. From the 2000 WPA, the conscensus became 2007 and no geologists predicted it any later than 2020.

Instead of the short-run thinking that Mr. Bailey exposes, we must begin considering longer-term thinking if this country can survive the slow-moving economic, social and political disasters predicted by The Big Rollover/Peak Oil and Global Warming.

As he no doubt knows, demand always "corrects" after a large price increase in the short-run. IN the long-run, however, only by producing substitutions for our drive-first default position will we ever deal with our problems. Those substitutions ususally take decades to build -- witness the quarter century Tyson's Corner metro debate -- before oil usage can truly increase in elasticity.

America's usage of oil is the ultimate example of "market failure" and when one considers the disturbing possibilities inherent in Peak Oil and Global Warming issues, waiting for the market to correct itself -- as people as diverse as Charles Maxwell, the energy guru, Robert Franks, the NY Times economic columnist, and even automakers like William Ford IV have said -- will be waiting too long.

Mr. Bailey, furthermore, fails to understand one crucial concept in his market first perscription. America owns about 226 million cars and trucks of which almost all run on gasoline and diesel today. If suddenly, somehow, there were vehicles which did run on water/hydrogen/biofuels and IF they were produced in enough numbers and IF there were logical places to stop and service such vehicles, there is immense value in the vehicles we already own. Will we throw all that value into the junk yard?

Traditionally, America turns over our vehicles about 8 percent a year. In the seven years the Intergovernmental Panel on Climate Change now says we have to stabalize C02 emissions before threatening one quarter of all species on the planet, we will turn about half of our cars -- and most of the new vehicles will still burn gas/diesel and still emit pollutants, including C02, IF perhaps not as much.

I wouldn't bet on Mr. Bailey's hopeful analysis.

Sean 5/17/2008 10:13:51 AM

Ted,

Thanks for the correction. I do agree with the opinion that we need to get off of our dependance on oil - particularly from foreign markets. Perhaps the shock we are now feeling is going to wake this country up. We are so used to using everything in excess in America. I do believe that the free market will take care of itself, and government "intervention" and politics make matters even worse. This summers driving season is going to be shot and eventually the price of fuel is going to force us into smaller more efficient vehicles. We should have been driving diesel powered cars years ago. Why? The diesel engine is 30-40% more efficient than a gasoline engine. I know this because I work in the industry. The europeans have known this for 20 years. The volkswagen rabbit (diesel) powered got 40-45 miles per gallon in the early 80's! Why aren't we driving more electric vehicles? Because oil at $20 didn't make it worthwhile.

GM made a bunch of these in the 90's and they were taken off the market because oil companies crushed the idea. Ever see the documentary "who killed the electric car?"

thetarminator5/17/2008 2:53:06 PM

Anybody have any real data out there like:

How many $B does it take to get 100,000bpd out of the oilsands?

What's the daily cost of a deep water drill rig?

What is the success rate of exporation drilling?

How much does it cost to build a new refinery (even if some non-nimby lets you)?

I bet if you answer those questions you'll find the answer to why oil is up.

anaconda5/18/2008 12:54:29 AM

The one issue the Peak advocates failed to grasp in this thread was the existence of deepwater, deep-drilling. Sure, one gentleman referred to the alleged Brazilian find. But it's not just alledged, it's real enough that Brazil's Petrobas has contracted 80% of the deepwater oil rigs.

The geologic formations this oil has been found in are repeated all over the world. And the finds are huge themselves. America has a virgin area called the Carolina Trough off the East coast, about the size of the state of South Carolina. The area is similiar to the area of Brazil's coast.

Oil is being discovered all over the world. Many countries like Mexico and Indonesia let their oil industry fall off with poor investment. That's starting to change, at least in Indonesia.

Oil exploration and production from just beyond the continental shelf has the potential to satisfy the world's need for oil.

Check out the blog Oil Is Mastery for deepwater oil exploration information.

5/18/2008 1:06:41 AM

Sean - OMG, thanks so much for the tip on 'who killed the electric car'!!!

I've posted an article on my blog about it

http://declineusa.wordpress.com/2008/05/18/who-killed-the-electric-car-sonypictures-documentary-2006/

jim5/18/2008 6:26:37 AM

@ anaconda

Do you believe in Santa Clause as well? Abiogenic oil is a pipe dream. If oil wasn't exactly what geologist believe it is then they would not have had as much success at finding it over all of these years. It exists where they drill because they know what it is and where it collects.

But, let's play along for just a moment. Suppose there is oil being made perpetually at the earths core. Do you think it will be as cheap to get it as it is the free flowing stuff we have previously found? That is the problem isn't it? Oil is expensive? Not that there isn't any more oil but that it is way more expensive to recover it now, right? How is drilling through miles of earth and ocean going to bring the cost of a barrel of oil back down to the $10 it was only 10 years ago? Not to mention the cost in energy that it takes to undertake such drilling procedures.

Every once of our resources going forward, mental, physicaland financial needs to be concentrated in finding a clean, renewable alternative to oil.

Ted Ollikkala5/18/2008 8:46:51 AM

@anaconda

Assuming we can find plenty of oil to satisfy the world's demands; If we keep right on using oil the way we've been using it in the past, what's gonna happen to the earth's atmosphere?

As Ted Turner put it recently on Charlie Rose (April 1 2008), there won't be any humans left to ask the question. Global Warming, droughts, inability to grow crops, severe food shortages, and eventual resource wars will lead to collapse of civilization. And the trigger was emissions from burning fossil fuels.

Ted Turner was absolutely adamant that our nation's top priority after eliminating nuclear weapons is to find a sustainable, renewable source of fuel.

Finding more oil just digs the hole deeper for all of us. In fact, the Saudis are smarter than we are: they're leaving some in the ground for their grandchildren.

LAW7575/18/2008 9:55:51 PM

The Peak Oil problem we now face is a very complex one that is resistant to the analysis of arm chair philosophers like Mr. Bailey. I take issue with many of Mr. Bailey’s points but for brevity I would like to address just one.

The Devil is in the details.

Mr. Bailey states, “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.”

Energy Analyst, Tom Whipple at the “Falls Church News Press”, makes the following point in paragraph 3 of his most recent 15 May 2008 article, “The Peak Oil Crisis: Diesel” found here

http://www.fcnp.com/national_commentary/the_peak_oil_crisis_diesel_20080515.html,

“The reasons for this surge in distillate prices are easy to understand. Conventional oil production, from which distillates are made, has been flat for the last three years while demand from Asia and the Middle East oil producers has been rising rapidly. The trend into higher-mileage diesel powered cars in Europe and other places, which has been underway for many years, is having a major impact. In some European countries, diesels now account for over 70 percent of new car registrations. This change in demand is leaving Europe and a few Asian refiners with a surplus of gasoline but not diesel. The overseas refiners are happy to sell their surplus gasoline to America which still wants prodigious quantities of the stuff. This, believe it or not, helps keep gasoline prices lower than the price of crude suggests it should be, as unusual quantities of gasoline keep arriving at our shores.“ Tom Whipple FCNP.

It seems to me that the current high US gasoline inventories that Mr. Bailey takes such solace in, are due to the result of the reallocation of an existing resource not the excess capacity of that same resource in total.

This is dangerous because guys like Mr. Bailey are using the excuse that we have plenty of gasoline to postpone the hard decisions we all must ultimately face. Everyday we delay will make it that much harder on us when the time comes when we have no choice but to face the music. I stand with many others who are saying that this time the Wolf really is at the door.

DunlapBelly5/20/2008 12:28:56 PM

A big ho hum. I drive 7 miles to work or 14 miles a day. I live where I want to live and don't vacation much. So even if gas goes to $7.00 a gallon, I will still drive my smoldering 96 Jeep which gets 20 mpg because IT IS PAID FOR!

So what if it costs me $4.90 to go back and forth to work a day? I piggy back the grocery store, post office, and errands and always have. My next car will be a small hybrid with flex fuel capacity no matter what oil does. I do think that the weak dollar and speculation are driving this bubble and a crash is going to happen, just like HOUSING bubble and just like the 2001 Stock Market bubble, this one is going to leave a lot of LONGS broke. Timing is everything, but I think the shorts will win soon.

vivek5/20/2008 4:53:59 PM

I think the high price of oil will cause a severe economic slowdown -- and this will bring the price of oil down.

Of course, it is not possible that the oil price goes up to $200 and goes up and up and up.

Businesses/Customers are paying for this and sooner or later the buying power will come down and there will be bankrupcies.

At that point (with demand crashing) the oil price will come down.

LAW7575/20/2008 7:20:02 PM

Oh Hum, might not be so sanguine if he did no have enough food to eat.

There are two nations who have suffered through a PEAK Oil transition, Cuba and North Korea. Two years after the Berlin Wall fell in 1989 Russia turned off the oil to Cuba and North Korea.

North Korea’s agricultural system failed and millions of North Koreans starved. Cuba successfully made a transition to post industrial agriculture and local food growing system which has a lot to teach us Norte Americanos. The Cubans have a lot to teach us about growing food.

Watch:

Urban Food Growing in Havana, Cuba

http://youtube.com/watch?v=jRz34Dee7XY&feature=related

It is estimated that it takes 10 calories of energy (from oil) to produce 1 calorie of food. We now rely on the infamous 1200 mile salad; we no longer eat local.

By about 1960 all the world’s naturally arable land was under cultivation. Starvation was predicted but along came the Green Revolution which is made up of two components. One is genetically modified plants that offer higher yields; the other was the wide adoption of oil based fertilizers, pesticides and industrial farming techniques (tractors, combines etc).

During the 19th century 30 bushels of corn were produced from one acre of land. Today we grow 160 bushels of corn on that same land.

Industrial farm machinery and industrial fertilizers make this possible.

There are 30,000 corn plants on an acre of land. If you hand plant an acre with a sharp stick placing one seed every 5 seconds working around the clock it will take you 173 days to plant that field. Farm tractors powered by diesel fuel can plant our field in a few hours.

There are 1.3 million wheat plants planted per acre. Imagine hand planting a wheat field or the state of Kansas by hand.

A 2 pound box of cornflakes requires the energy equivalent of ½ gallon of oil to produce. Timothy McVeigh was a man who understood the power contained in the fertilizer we use to grow our food.

There is a tortilla food crisis in Mexico, a Pasta crises in Italy, food costs are raising dramatically world wide.

I can recommend the following article from Harper’s Magazine. "The Oil We Eat: Following the food chain back to Iraq"

By Richard Manning

http://www.harpers.org/archive/2004/02/0079915

Driving to work will soon be the least of our problems.

Sean 5/21/2008 7:28:31 PM

I have now come to the complete conclusion that the run up in oil has very little to do with fundamentals and everything to do with the huge influx of cash and investment into the commodities market, especially oil.

I am in sales and while on the road I have sirius radio tuned into CNBC all day. The correspondent at the NYMEX today reported that at one stage she could hear traders yelling "GO! GO! GO!" as the price per barrel was ticking up over $133 per barrel, and I quote.

Boone Pickens decides yesterday to give his prediction of $150, and the price today jumps over $4. No surprise that he is an oil speculator who has made millions in this market

Michael Masters, a well respected hedge fund manager, for Masters Capital Managemet testified before a Senate Committee

hearing today "[Commodities] are experiencing demand shock from a new category of speculators: institutional investors like corporate and government pension funds, university endowments, and sovereign wealth funds,"

Also"Index speculators are the primary cause of the recent price spikes in commodities"

Proof: "Michael Masters of Masters Capital Management LLC says that China is not responsible for increased oil prices since, over the past five years, the increase in demand by market speculators is nearly equal to the increase in Chinese demand"

Did you read that right? The increase in demand from market speculators is NEARLY EQUAL TO THE INCREASE IN CHINESE DEMAND"

Conclusion - there has been a complete disconnect from any fundamentals, and the market is now in a state of "mania"

When you have this situation, you have, and lets all say it together "a huge bubble"

Investors are now frantic to get in any way they can.

Welcome to the gold rush of the new millennium.

Where does it stop? As long as these a-hole trades keep pouring in the cash, and they all keep propagating their fear and belief that the sky will fall tomorrow and we are all going to die - God only knows.

I hope it bursts soon, and I hope it hurts them like hell. Soon,

these guys are going to get some very bad press. Congress now has them in the crosshairs, and the public who are paying for this rally are going to get very annoyed at $6 per gallon.

World dema

Larry5/21/2008 7:31:09 PM

The free market will solve this problem. But who says it has to solve it with oil materialized out of thin air. The real commodity is energy not oil. I predict a shift to electricity as the main energy commodity of the future. Inputs to the grid from solar thermal and wind, outputs to electric transportation (freight, transit, cars).

Even if infinite oil was available, at some point the cost of recovery exceeds the cost of alternative energy sources.

Ian5/23/2008 12:43:43 AM

Wishful thinking aside, at least I tried to tell you the truth.

I am wise enough to know the dreaded truth about one’s life. Most of it is entirely out of your control and in the hands of your political leaders. It is nice to think otherwise, but sadly life experience proves otherwise. If you so happen to have views that lie in the minority, or against elected authorities, then you run the risk of your views being overlooked, or even unheard. This is called political expediency.

For example; I personally would be aghast at the current economic situation facing New Zealand. However I admit my views are biased.

I believe in the likelihood of extreme Climate Change brought on by excess Man made greenhouse gas emissions, and peak oil. I admit that I have also researched heavily into both sides of the argument. I admit that I am not a believer in these unfortunate scenarios because I am casually biased in favour of them.

I am a believer because of much research, studying recent climate trends, and over whelming scientific evidence.

Not to mention the undeniable facts. Oil is currently over $130 per barrel. There is no good reason for this high price apart from oil demand exceeding oil supply.

Peak oil has arrived except no-one wants to say it officially. Suffice to say, you know things are getting serious when the IEA makes the following statement yesterday:

The International Energy Agency, whose forecasts of world energy supply are perhaps more influential than any other, has expressed deep concerns that the world's oil supply can no longer meet demand.

In other words, that peak oil may be here.

Alan5/30/2008 10:49:07 PM

The higher oil prices go,the less consumers are going to buy.Not just because they don't want to buy fuel at such high prices,but simply one will not be able to afford it at all.With that, the demand for fuel plummets.So I say to the rich and greedy oil companys,keep blowing your balloon,it will burst on you very SOON.

Johnson10/17/2008 1:48:59 AM

I think Mr Bailey either understands the economy so well or is very good at making prediction and inferences. Mr Bailey obviously has a true understanding of how the demand and supply forces work tegether and his statistical evidence has led to a spot on evaluation of the true economic situation.

For your information I am a Nigerian and you should go check the Oil Prices now.

To all of you short sighted people, I think you should delete your useless posts that lack foresight and indept economic analysis.

Thank you Mr Bailey and please continue to educate us on the trends you find in the economy

Zigster12/23/2008 3:59:37 PM

Always fun to revisit this prescient article and read the comments, both intelligent and idiotic

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by RONALD BAILEY published on 5/15/2008 in the Essays category

by RONALD BAILEY

published on 5/15/2008

in the Essays category

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