Key words :
A Recent History of Oil Prices.
28 Dec, 2008 01:39 pm
The price of oil has oscillated from an all-time hike of almost $150 a barrel to a low of $30, hand in hand with the credit-crunch and the inextricable economic connection between money and oil. Why? Expect a Long Emergency...
The above data stress the point that the price of oil is highly sensitive to the world political situation and to a general sense of confidence, including that in the stock markets. When the $147 barrel appeared, it did appear there would be no stopping the escalating price of oil, and that by December 2008 a barrel of oil might cost around $150 or more, amid speculation that by the end of 2009, it would be nearer $200. However, oil prices declined by more than $20 over the next two weeks in July 2008, and seemed to stabilise at near $125 a barrel on July 24, 2008. A forcing factor came into play, which was that the very high price of oil had changed people’s behaviour and they were now driving less with a reduced demand for oil. Oil prices then dipped further, reaching $112 a barrel, on August 11, 2008.
On September 15 the $100 psychological barrier was again broken, but in reverse, when the price fell below $100 for the first time in seven months. On October 11 there occurred a massive crash in the value of global equities, with a barrel of oil falling by 10% to $77.70. In consequence of further economic slowdown the price continued to slide and today (December 4, 2008) it is trading at around $45 a barrel. Rather than the $200 predicted last summer some analysts are now predicting a $20 barrel sometime during 2009. I must stress, however, that even if this does happen it will be a short-lived event, because the facts of geological limits to production, increased production costs to obtain more difficultly recovered oil and that demand is still rising (demand is simply rising less steeply during this economic recession, but it is still in the ascendant).
The upshot will be a gap between the demand for crude oil and the limits of how much of it can be produced, a quantity that must inevitably fall beyond the point of arrival of “peak oil”, which will force the price up again. Thus oil will become a commodity that is both increasingly scarce and relentlessly expensive. The price of oil (and that of all commodities), is subject to major variations over time, since they are inextricably linked into to the overall business cycle. When the demand-supply gap is reached, oil prices will soar, but the commitments and habits that determine the energy use of oil-users will take time to adjust. It is time-consuming and expensive to introduce more production capacity in the near term, but in the longer run, both businesses and individuals will act to cut back their oil use in response to the driver of high prices. An optimistic economist might argue that high prices promote new investment in production and so new sources of oil will emerge on the market, gradually restoring a supply-demand balance.
The remarkable hike in the price of oil in the summer of 2008 was driven partly by a period of brevity when global demand for oil outran its supply. The OPEC nations were encouraged to ramp-up their production to get the price down for western nations who would be unable to maintain their demand for oil if its price remained at such high (and relentlessly increasing) levels. My suspicion is that the summer-spike in oil prices, led to a fall in oil-use and a significant curb in demand for cars and other goods, which became notably more expensive, and precipitated the present economic downturn. Job losses and less disposable income then meant that many in the low-income bracket would be unable to pay-back their mortgages and a credit-crunch ensued, with a lack of confidence in and among banks who had lent money rather carelessly. The increased output of oil by OPEC along with a contraction and the threat of further slowdown in the business sector, hence less oil being used, has created a minor glut, thus forcing down the price of oil, and increasingly so along with the declining value of all equities. While a low oil price should help businesses to invest and expand, the credit crunch and fear by the banks to lend money has acted in the reverse of this, and prompted a recession.
On the basis of microeconomic theory, when supply exceeds demand, the price of a commodity should reduce to the nominal cost of production of the most expensive source. In the case of oil, as its price drops, the most expensive wells become uneconomical and are shut down, at least temporarily. A price equilibrium is met at a point near the production cost of the most expensive source required to meet global demand. The variation between what the market can bear in the first days of shortage to the marginal cost of the last well in times of surplus can be enormous. Indeed, the price of the majority of commodities including metals and food are subject to equivalent large swings over time. As global oil production begins to decline, following “peak oil”, oil prices are likely to become increasingly volatile than before the peak, because the range of production costs among all sources supplying the market will be much wider. Major oil fields exist where the cost of production is comfortably below US$10 per barrel, and for decades their output was sufficient to meet the whole of global demand for oil. Indeed, many such cheap wells still provide a substantial proportion of the world’s oil .
The shortages and high prices that are inevitable in the future will render viable the extraction of oil sources that cost $50, $70, or $100 or more, a barrel, including offshore/deep water fields, oil sands, oil shale, and enhanced/secondary recovery from depleted fields. As couched in the jargon of microeconomic theory, the supply curve will be much steeper than in past years. Shifts in demand, either up or down, will hence cause swings of relatively greater amplitude in the market price. Nonetheless, even the most expensive sources of oil will be unable to provide anywhere close to the 30 billion barrels of crude oil that the world currently depends on each year. It is the rate of supply (variously termed rate of flow, rate of conversion or rate of recovery) that is at issue. Put simply, it doesn’t matter how big the volume of the resource is, if oil cannot be recovered at a rate of 85 million barrels a day to meet present demand (and rising), we must learn to live by using less oil. This poses a challenge that is simple but not easy, since it must involve curbing our reliance on personalised transport, mainly cars, which most of the world’s crude oil is currently used to run. The corollary to this is the need to develop rapidly, more localised communities, that depend far less on cheap oil-based transportation, which will no longer exist. Meanwhile, expect a Long Emergency situation, as Kunstler has warned us: the demand-supply gap for oil, and then peak oil will bite hard on the tail of the credit-crunch.
This is the final section to an article entitled: The Oil Question: Nature and Prognosis" which will be published in the popular science journal "Science Progress", probably around now. I thought I would put it as a posting on here for any general interest and/or comments.
Key words :
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While it is true that in times of crisis people have fewer kids, in order to get through this crisis we will have to talk about it. if everyone on Earth lived like the USA does now we would need about 3 Earths of resources, but that's with the current population.
If on the other hand the entire population of the earth was only about 300 million (the population of the USA ) we would have resources to spare. I agree that this is a very simple fact that is obvious to the most casual observer, however I'm guessing about 80% of the world doesn't agree with it.
Most of the world's economic growth depends on population growth so yes the world will be poorer, but isn't that better than being dead?
Independent studies conclude that Peak Oil production will occur (or has occurred) between 2005 to 2010 (projected year for peak in parentheses), as follows:
* Association for the Study of Peak Oil (2007)
* Rembrandt Koppelaar, Editor of ?Oil Watch Monthly? (2008)
* Tony Eriksen, Oil stock analyst (2008)
* Matthew Simmons, Energy investment banker, (2007)
* T. Boone Pickens, Oil and gas investor (2007)
* U.S. Army Corps of Engineers (2005)
* Kenneth S. Deffeyes, Princeton professor and retired shell Geologist (2005)
* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)
* Chris Skrebowski, Editor of ?Petroleum Review? (2010)
* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)
* Energy Watch Group in Germany (2006)
Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.
Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: ?Peak Oil Could Trigger Meltdown of Society:?
"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."
With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won?t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.
This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: http://www.peakoilassociates.com/POAnalysis.html
I used to live in NH-USA, but moved to a more sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. http://survivingpeakoil.blogspot.com/
There is a good Hubbert analysis that you can do on human population growth, which predicts there will be peak population in 2024 at about 7.1 billion (it's 6.7 billion now so not far to go) and then it will decline to about 2.5 billion by the end of the century.
I would not be surprised, since the resources of the world won't support 9 billion or 12 billion people. So, there will be wars etc. starvation, and a steady die-off mostly in the developing world where population has quadrupled in the past 100 years compared with maybe a 50% increase in the industrialised West.
However, we depend far more they do on oil, gas, etc. and so our times may prove especially hard to deal with.
Are you thinking there should be some means made to reduce world population, beyond "natural wastage", to use the industrial term?
Thanks Clifford for those links, and thanks Again Andre' for this very convincing graph!!
Happy New Year to one and all!
We also know that excessive consumption is a cultural trait. Even in the hedonistic US, millions of people have learned they can improve their living standards and lower their stress levels through the principles of Simpler Living, a loosely-organized social movement that encourages people to think long-term about spending decisions.
A third tack is to balance government budgets. Here I'm addressing mainly the US government, which used deficit spending to artificially stimulate the economy, with the disastrous results we now are seeing. If people had to pay taxes to cover the benefits and services they demand, the reduction in their take-home pay would necessarily curtail extravagant spending.
No doubt, smarter minds can devise even better solutions. I think that just just to throw up our hands is no more appropriate than surrendering to climate change.
There is no doubt that life is going to change and is already changing - rapidly and forever, and I am beginning to believe that the world run by the markets and their inextricable tie to oil price is entering Kunstler's Long Emergency phase. But how that is managed, will take cooperation among the governments of the world, and at the moment I think they are individually hanging on for grim death because we are in totally uncharted territory.
I think everyone is hoping for a period of calm, and a return to economic growth of some kind, but I am not convinced this will happen. My prediction is some recovery in 2009 (with a rise in the oil price), but then the markets will crash once more; to what levels it's impossible to say?
However, each time this happens it takes-out more institutions and companies and the overall outcome over time is a disintegration of capitalism.
I believe that Karl Marx was highly informed about capitalism, but out of interest, not that he wanted to use that knowledge to bring it down, because he knew that it had the seeds (namely those of the idea of limitless growth) so that would ultimately destroy itself.
I think we are seeing the end times for capitalism and the transition to some other, perhaps Schumacher's "Buddhist Economics" of equity would require so much "handing over" by the West that it will not be done, until the market forces bring the whole house down.