POLL: Credit crunch, new IEA production high (but what about the net?), lower world exports? Whither Oil Prices?
Posted by Nate Hagens on December 16, 2007 - 12:27pm
Topic: Miscellaneous
Tags: poll [list all tags]
There seem to be larger and larger forces impacting oil prices. A potential credit crisis, with lower monetary wealth and tighter credit would certainly reduce demand for oil. Alternatively, if global central banks combat this spectre by continually providing liquidity, this primes the inflationary pumps, which is bullish for oil. At the same time, we recently hit a new all time IEA production high (at least measured by 'gross' production). Will impetus of 2008 Chinese Olympics and other developing countries thirst for oil counterbalance an OECD recessionary impact? Will the reduction in exports from oil producing countries offset any demand destruction? Does anyone have a clue?
Cast your vote in our POLL Feel free to discuss your viewpoint and rationale below the fold, especially if it differs from one of the packaged choices....;)
I am way out of my depth discussing monetary theory, but I am fascinated by the differences between Jim Puplava (inflation next year) and Stoneleigh, et al (as I understand it, deflation next year).
Monetary purists object to my characterizations, but my best estimate is that we should expect to see deflationary trends in the auto/housing/finance sector and inflationary trends in food & energy.
It depends on how governments and institutions handle the crisis. If they let the marginal bank and hedge fund fail, this will have a domino effect on consumers and demand will drop - this would probably be best for long term financial health (if thats a valid word combination...;) This would be deflationary
Alternatively, they could refuse to let any banks fail - and provide liquidity at the discount window whenever necessary. These billions don't come out of thin air - well actually they do. So there are more dollars/Euros/Yen chasing fewer barrels of oil and MCF of gas - hence inflation.
Were I running a hedge fund, I would be a huge buyer of 'vol', as I expect some 3-4 standard deviation events in energy and financial markets in coming years - we've never been dealt a hand quite like this one and people normally underreact to large themes.
If there were a pure play on a company that made tranquilizers and sedatives, I might buy that...
It seems that to have steep inflation across the board, the Fed has to figure out how to get money into the hands of the 'volk' and not simply make huge low-interest loans to banks which might in turn provide cheap credit to large corporations which in turn might expand their payrolls, etc. Lot's of 'mights' here in the trickle down scenario, and, in the end, it is still credit that presumably must be paid back in some way and not a simple expansion of money that will stay in the economy indefinitely.
On reflection of the above: The use of easing credit to stimulate the economy rests on the assumptions of classical economic theory (read: cornucopian). In times of increasing scarcity of one of the fundamental commodities, energy, this assumption is simply wrong.
the problem with the poll is that we are looking at a recession in 2008, but possible hyperinflation after that. if I was asked for the next 6 months, the answer is very different from the answer for two years.
I think that $60 is possible in 2008, but $200 is also possible in 2010. It all depends in too many longer term variables that are currently unknowable. The only fact is that a constant is that oil production will be declining in the future.
good point . Ive changed it to 12 months out....
"Monetary purists object to my characterizations, but my best estimate is that we should expect to see deflationary trends in the auto/housing/finance sector and inflationary trends in food & energy."
WT! You got the lingo! You sounded just like an economist there for a minute.
:) :) :)
Jeffrey - I think you are spot on here. And the evidence is already there in UK equities for all to see. Banks and house builders have been hammered, energy and resource stocks have carried on up. And the market moves side ways - and down.
Euan,
As you and I know the pain from low oil prices in the past was highly concentrated, while the benefits were very diffuse. Today, it's the opposite. The benefits of higher oil prices are highly concentrated, while the pain is very widespread.
In a larger sense, I think that we are seeing is a fundamental transformation in the relative positions of producers and consumers, especially regarding food & energy, which led to my oft-repeated advice: "Cut thy spending and get thee to the non-discretionary side of the economy."
Also in a sense the credit bubble and oil prices are tightly coupled since cheap credit has allowed the economy to expand despite the flow of money into ever increasing commodity prices. I have to think that the credit bubble and commodity esp oil price increases are tightly coupled. Without the credit bubble demand would have stalled at much lower prices.
So in my opinion the credit bubble and high commodity prices are synergistic. The problem is this ends if commodities are scarce with the economy being composed primarily of non-discretionary spending and high commodity prices. Your right about that being the place to be but its also a sign that the economy is effectively stalled. I've traveled to a lot of poor countries and noted that the milk producers always make money.
I would consider oil producers to be pretty much in the same league as milk producers. They sell a product we must have no matter the cost!
The credit bubble have had a big influence on spending, and with the credit squeze hitting hard in '08 spending will surely plummet.
The average investor will not get hit by the credit squeze as much as the average spender.
When spending stops I think oil will be pretty far down the list of things not to buy.
I would mention:
No need for new clothes as my wardrobe is full
No need for a new car (although this would be wise)
My summervacation alone is more costly than my anual gasoline bill, and is easily made cheaper
No need for homeimprovements.
No need for another big TV or other gadgets.
I believe the above mentioned were the biggest winners of excess spending the past years, and the sectors to get hit the hardest in '08.
I feel very sorry for places like Thailand that gets a big part of GDP from tourism.
Almost everyone I know have been far away on holidays several times in the last 5 years (far away is minimum 6 hours flight)
Sectors to die in '08:
Tourism / Auto / Home improvements / Gadgets
But demand for gas just will not die!
On a personal note my spending on petrol is less than 4% of household income after tax, and that is with danish price of petrol around 7$/gallon. The cost of fuel is such a small part of the cost of the car and such a small part of the budget that I see several less painfull places to save.
Rune
Your forgetting that fuel costs are built into virtually everything you buy. So even if you did not own a car indirect fuel usage accounts for a good bit of your expenditure. For many articles the cost of shipping and packaging is greater than the actual item.
So you can expect pricing pressure across a broad range of products even as a slower economy is causing a downward pressure on prices. The net result is of course profit margins for most corporations will begin to fall and the weakest will cease to exist.
Not sure what you do for a living but for most of use if the consumer stops spending on gadgets which still have a fair amount of human input in their manufacture distribution and sale and a retreat to basic commodities which have far less human intervention will effect all of us. Especially as people move to preparing their own food at home.
I think focusing on direct fuel usage is missing the big picture. I barely drive at all but it does not make me comfortable. For better or worse our economy is based on consumption and in particular these days on luxury items.
Its like the housing bubble people are now realizing that it hurts everyone not just the people who where directly involved.
Well, everybody can't do that at the same time. Ok, tourism is an axception here.
If everybody cuts discretionary spending to buy fuel and fuel production drops, it's price will just rise until somebody can't afford it.
A net exporter reminder. Our middle case shows that the remaining post-2005 net exports from the top five net exporters will be on the order of 100 Gb of total liquids, versus 2005 net exports of about 8 Gb. Net export decline rates tend to accelerate with time, and I expect that the 2007 top five net export decline rate will be sharper than the 2006 net export decline rate.
IMO, this is the key difference between the early stages of this recession/depression and prior events. One of the benefits of a recession is lower prices across the board. Who knows where oil prices are headed, but in relative terms--especially given the export situations--I think that they will be extremely high.
Jeffrey,
if you don't have time to finish off the entire article on the ELM how about posting a simple table of net oil exports for your middle case for the next 10-15 years?
In addition I was wondering if you had any thoughts on what might happen as these exporters begin to realize their upcoming negative predicament -and that it is closer than they think- as there is a 'rolling cascade' of countries going from Exporters to Importers. Personally I would expect a frantic investment in substitutes: solar thermal arrays, the nuclear option, in-country downstream oil product production and yes even taxes and allowing some demand destruction to bite... I.e. as awareness grows consumption declines somewhat.
Nick.
Our middle case shows a 50% net export decline by the top five by 2015. Or, our middle case shows that it would take 100% of the total 2015 net exports from Saudi Arabia, Russia, Norway, Iran and the UAE to meet current US net imports.
The EIA data show a -3.3%/year top five net export decline rate for 2006. Based on year to date data and assuming the same rate of increase in consumption in 2007 as 2006, I estimate that the 2007 top five net export decline rate will be about -5%/year, in other words an accelerating net export decline rate, which is what our model and recent case histories show.
Some analysts and the media are gradually beginning to catch on to the ELM, but they are primarily focused on the consumption side, without paying attention to the possibility of lower production combined with increasing consumption, which results in the accelerating net export decline rate.
Shouldn't be using UAE there. Kuwait is the 5th largest exporter. Shouldn't effect the numbers much. Doesn't matter. 5 through 8 are virtually identical with their production and exports controlled by how messed up and corrupt their leaders are at any given time. The split between 1st and 2nd rate exporters comes after Angola.
http://www.eia.doe.gov/emeu/cabs/topworldtables1_2.htm
If I understand you correctly a 50% decline by 2015 would be an absolute disaster... no?
I'm trying to get my head round this as I don't know what % of the total production amount (85 mbpd?) will see this 50% deduction. As an example if we produce 85mbpd and -say- 55mpd of that is 'Net exports' you are saying by 2015 we would be down to 27.5mbd of Net or the equivalent of NOW producing (85-55) + 27.5 = 57.5mbpd
I would guess at this NET decline rate that things are going to be looking pretty grim in just 2 or 3 years no? (I mean 50% decline is 7%+ a year, although I think you said it accelates over time. Whats your extimated decline %for 2007, 8, 9 and 10?)
Nick.
Total world net oil exports (total liquids) were around 47 mbpd in 2005, and the top five accounted for about half of that, about 23.6 mbpd in 2005.
I estimate that the top five 2007 number will be around 21.6 mbpd, which would be an accelerating decline rate (-3.3%/year for 2006, estimated at -5%/year for 2007), which is what our model and recent case histories suggest.
We are forecasting that this slide in net exports by the top five (and by many smaller exporters too) will continue, and our middle case is that the current top five will be down to about 12 mbpd by 2015.
Net exports is falling both as a result of falling production as well as rising consumption.
If a country produces 100 oil and consumes 80, a 10% increase in consumption will lead to a drop in export of 40% with constant production.
If production falls 10% in the same period exports will have fallen 90%.
The bad news is that in the oilproducing countries people dont have to pay full price which reduces the demand destruction in these countries.
In the ongoing auction for oil we must remember that a large part of the oil is not sold at full price.
Personally I just hope that the danish government will lower the tax on oil with rising prices.
When oil sells for 150$ they could easily lower the tax on petrol to make end users price paid pretty much the same and still get the same revenue.
I guess I am dreaming, but it would be a nice way to protect end users.
If they just decide that petrol should cost 10 DKK/litre this january and rise 1% each month they would be well of.
Rune
Household energy conservation will help the home improvements industry to some extent.
People might decide to vacation closer to home rather than just skip vacations altogether; this would be positive for US domestic tourism.
The one exception in your gadgets categories is television sets - the switch to all-digital in 2009 will force a lot of replacements.
Jeff,
I'm feeling mixed on this. If something's going to go up in price and I'm going to need it eventually then I'm thinking I ought to buy it now.
Also, I'm wondering how to avoid losing money to inflation? I'm very open to suggestion on that point. Got any ideas?
One practical thing I just ordered: A sleeping bag so I can put the lower body into it and sit and work in a cold (40s Fahrenheit) room.
I'm also shifting my cooking toward using more raw materials and less prepared stuff.
*Also, I'm wondering how to avoid losing money to inflation? I'm very open to suggestion on that point. Got any ideas?
Hello FuturePundit,
Here are some suggestions from financial analyst and author Peter Warburton. This is found in an article titled *The debasement of world currency: it is inflation,
but not as we know it.*
I highly recommend his book Debt and Delusion.
The full article may be found at www.gold-eagle.com/gold_digest_01/warburton041801.html
****
Beneath the surface, the values of the dollar, the yen and the euro have been eroded simultaneously by the over-extension of credit. The latent losses in the credit system, emanating from non-performing loans and defaulting bonds, represent a charge against the value of the currency, as surely as if the edges of the notes and coins had been trimmed away. There has been a reduction in the quality of credit rather than an increase in the quantity of money (net of write-offs). The search is on for a valid yardstick, a measure of monetary value that has not been (and cannot be) distorted by central banks’ firefighting and wrecking tactics.
The search is on for the perfect hedge
What would be the ideal characteristics of such a numéraire? First, it would be in fixed physical supply. Second, it would be resistant to weather-related influences. Third, its ownership would be diffuse, rendering futile any attempt to restrict supply through a non-competitive structure. Fourth, it must be freely tradable. Fifth, there would be no futures or options markets attached to it.
Finally, I list some of the candidates, in no particular order. Each seems promising, yet none of them seems to me to satisfy fully all five of the requirements above.
1. Arable land with a dependable climate
2. Oil refining capacity
3. Electricity generating capacity
4. Water treatment capacity
5. Drinking water, bottled or piped
6. Coastal access, harbours and ports
7. Palladium/platinum/diamonds
8. Real estate in long-standing, distinctive locations
9. Antiques, fine art, stamps and coins
10. Commodities without futures and options markets
"there would be no futures or options markets attached to it".
interesting. but the search for the perfect hedge has always been on. some describe it as a search for liquidity. who knows its origins? tulipmania? does mankind really know how to acheive this successfully without these markets? OK. I see your point.
Cold room 'livin....
1) Cover your head
2) if you do not need fine fingerwork - there are these great new gloves with 'heat pipes' - takes heat from your arms and moves 'em to your fingers.
3) See #2? If you keep the 'core' body as covered as you can, that means your toes and fingers will stay warmer.
4) The less you eat, the colder you will feel....starvation protocol for the body.
All I know for sure is what I am doing--working very hard on finding "leftover" oil fields in the Lower 48.
It might not be a bad idea to invest in the equipment and materials needed for small scale permaculture gardening, with a plan to learn how to do it and to then teach others--basically a plan to set up a small business of showing others how to become closer to net food producers.
In other words, strive toward being a net energy and/or net food producer.
You are exactly right, all else being equal. With zero change in the money supply, that is just what we would expect to see.
However, I don't expect to see zero change in the money supply. The government will inflate the money supply to obfuscate the true situation.
I've just posted on RGE Roubini's blog (under the nickname "RealThink") the following analysis about the "inflationary trends in food & energy".
Professor Roubini wrote:
"The arguments against policy rate easing by central banks are thus threefold:
...
c) it may lead to higher inflation."
Not "may". Last week's PPI and CPI data shows that the easing so far already "has". And further easing can only be expected to bring more.
"There are at least four reasons why these global inflationary forces will abate once this US hard landing occurs:
...
d) a sharp fall in oil, energy, food and other commodities prices as a global slowdown emerges."
To assess the validity of the statement in item d), let's first look at the current situation and prospects of world crude oil (actually "All liquids", i.e. including biofuels) production and demand as depicted in page 48 of the OECD IEA Nov. 13 monthly report at http://omrpublic.iea.org/currentissues/full.pdf, updated with the figures from the highlight of the Dec. 14 report at http://omrpublic.iea.org/ , and projecting a December 2007 production slightly higher than November's.
World oil total demand (actual and projected):
1Q06 2Q06 3Q06 4Q06 2006 = 85.5 83.5 84.3 85.7 84.7
1Q07 2Q07 3Q07 4Q07 2007 = 85.8 84.7 85.3 87.1 85.7
1Q08 2Q08 3Q08 4Q08 2008 = 88.2 86.5 87.2 88.9 87.8
World oil total production (actual):
1Q06 2Q06 3Q06 4Q06 2006 = 85.4 84.9 85.5 85.3 85.3
1Q07 2Q07 3Q07 4Q07 2007 = 85.4 85.0 85.0 86.5 85.5
After looking at these numbers, it takes an extraordinary degreee of optimism to expect that production will "surge" in 2008 to meet the currently projected demand.
To see what kind of price action can be expected from these projections, let's compare global demand averages for whole years and their increases:
for 2006: 84.7 mb/d
for 2007: 85.7 mb/d (+1.1%)
for 2008: 87.8 mb/d (+2.5%)
with price action from the past year:
On Dec 18, 2006 WTI = $63 and EUR = $1.31, so WTI = EUR 48.
On Dec 17, 2007 WTI = $90 and EUR = $1.44, so WTI = EUR 63.
That's for a WTI price rise of 43% in dollars and 30% in euros in a year.
Thus, if a 1.1% increase in demand against almost constant production over Dec 2006 - Nov 2007 caused in 30% increase in price in euros, a 2.5% increase in demand against constant production over Dec 2007 - Nov 2008 can be expected to cause a 30 x 2.5/1.1 = 68% price increase in euros, to a price in Dec 2008 of EUR 106. Assuming EURUSD stays at 1.44, that's $153.
Let's now be optimistic and assume that 2008 production will rise 1.4% over 2007, leading to 2.5 - 1.4 = 1.1% as the differential increase of demand vs production in 2008, which is the same value as for 2007. The expected price increase would thus be a further 30% in euros, to a price of EUR 82 and $118.
And obviously, for the oil price to stay at current levels, the world needs for 2008 both an increase in production over current levels AND a decrease in demand from current projections for a combined total of 2.5%. I.e., if demand does rise 2.5% as currently expected, so should production, which looks extremely unlikely.
Therefore, for the oil price to remain in the current range, even optimistic projections for oil production lead to the need of at least a deceleration in global economic growth from current projections. And given the ease and gusto with which OPEC and Russia would cut production levels should a fall in demand take place out of a hypothetical deep recession, it's very unlikely that, even in that case, the oil price would drop substantially.
Now let's take a closer look at where the increases in demand came or are expected to come from, in order to evaluate then the likelihood that they could be prevented or even reversed by way of a hypothetical recession. From page 50 of the OECD IEA Nov. 13 monthly report, annual changes in Mbpd were/are projected to be for the key players:
Player 2005 2006 2007 2008
------------------------------
N.Am. 0.12 -0.21 0.21 0.22
Euro. 0.12 0.01 -0.25 0.21
APac 0.07 -0.16 -0.05 0.18
------------------------------
OECD 0.32 -0.36 -0.09 0.61
FmrSU 0.06 0.18 -0.18 0.14
China 0.27 0.46 0.39 0.42
Ot.Asia 0.17 0.07 0.26 0.19
LatAm 0.14 0.18 0.20 0.16
MEast 0.26 0.29 0.30 0.29
------------------------------
World 1.41 0.84 1.01 1.94
It's evident that the main culprit in the projected jump in demand for 2008 is the OECD, followed by the reversal of the 2007 FSU demand contraction, which the report itself describes as "an outcome that goes against the trend of strong economic growth, but could also reflect efficiency improvements or data quality issues." And within the OECD, the problem is that demand in Europe and Asia Pacific will switch to growth while US demand is staying its growth course.
Thinking now the other way round, if a reduction in global demand growth must be achieved, what are the likely candidates for it? Obviously the OECD, with a recession arising from the unfolding financial crisis. So we have a match here.
And it is easy to see that, even if that OECD recession materializes, the other players are extremely unlikely to reduce their oil demand. The reason for that being:
- For non-oil exporters like China and East Asian countries, the huge foreign exchange reserves that these players have accumulated over the last years, which make their situation entirely different from that in 2000-2003: having already saved for a rainy day (or rather decade), they can now afford to keep growing their internal consumption even if half of their customers curtail the demand for their products.
- For oil exporters like the FSU, ME and several LatAm countries, the fact that it is just not reasonable to expect they would refrain from growing the consumption of their own product.
To sum up, a prompt OECD recession is the only way to avoid triple digit oil prices in 2008 and will most probably result in oil prices staying in the current range. (This of course does NOT mean that such a recession is the long-term solution to the energy problem. It just provides a window of opportunity for addressing the problem in a decisive yet orderly way.)
As for food, the possibility of a fall in prices is even more remote. In the first place for its low elasticity of demand. Secondly because, with a reasoning analogous as that for oil, it is not reasonable to expect that countries that have amassed huge forex reserves or oil exporters would hesitate to draw from their reserves/revenues and skimp on food. Not to speak of food exporters. And thirdly because, with oil prices staying in the current range, the worldwide implementation of biodiesel production will most likely proceed, keeping the pressure on food prices.
Now, are there any other potential benefits from an OECD recession apart from preventing disruptively high oil prices and a likely consequent collapse in the dollar value and the loss of its role as the international trade and reserve currency? Yes, there are a couple of them, and probably of even greater importance.
1. As stated by Matthew Simmons in pages 35 and 36 of his Oct 23 presentation at CalTech ( http://www.simmonsco-intl.com/files/CalTech.pdf ) , allowing demand to follow the current growth path poses a significant risk of shortages in some finished products, likely followed by hoarding behaviour by users, which in turn creates a "run on the petroleum bank." (An ironical but wholly logical side effect of trying to prevent a run on financial banks or quasi-banks when the world starts hitting the physical limits to growth.)
2. Although a recession would certainly curtail demand for electric cars, energy-efficient houses and solar panels, a cursory look at the real world should be enough to notice that the current profile of aggregate demand includes, in a scale ORDERS OF MAGNITUDE greater than those above, things which not only waste fossil fuels but also leave society in a state of ever greater vulnerability to the unavoidable coming energy decline, suburban and exurban construction being the most conspicuous example, followed by production of inefficient vehicles, precisely the two items whose construction/production would be most affected by a recession. So we have another match here.
And I will end with a paragraph from past posts, which seems all the more relevant in view of proposals like Professor Roubini's.
There are a few big mountains in the world where you can drive to the very top. Those who have done that know quite well that it would be very unsafe to drive on the way down in the same way as on the way up. They make a driving paradigm change when they start the descent. In contrast, today's economists are severely paradigm-challenged. They have known nothing but the way up (to Hubbert's Peak), and they don't seem to be able to make the mental adjustment to the way down. As a result, their driving paradigms are becoming unsafe.
Personally, I expect a great deal of volatility but that prices will go lower as this credit story unfolds. This will come at a bad time: we need strong market (or other) incentives to continue exploration, scaling up of alternatives like wind, better battery technology, etc. To wit: a recession and lower oil prices now will make the production/depletion wedge wider down the road. So I voted that we will see $50 again in next few years (though I think all the options I posted are possible)
Note to our CERA readers, if we do see $50, it does not obviate the seriousness and urgency of Peak Oil at all. If anything it will give policymakers a misplaced sense of complacency. And it will make our efforts at TOD and other places trying to raise public awareness on resource depletion all the more difficult.
Nate -- "volatility" -- for me that is the one word that continues to sum up our prospects.
I have a notion that our world is "ungovernable" and so geopolitical concerns will add to volatility of oil price, as will various economic woes.
The underlying geological supply constraints will be a major driver in geopolitical chaos, as will the severe consequences of GW.
Water and food shortages and massive refugee problems will stoke the fires of conflict as more people feel victimized and excluded and intentionally abandoned by the bigger powers.
The more heavy-handed the big powers get, the worse the explosions of asymmetric resistance will get. A new kind of "arms race" and escalation of conflict has already emerged.
I keep thinking that many people will cry out for very authoritarian government simply to help stabilize or regularize the violence in some way. However, there will be plenty of powerful pockets of resistance to that as well.
So unless we figure out a way to make the powerdown process more equitable and peaceful, I think that volatility is the key word for the price of oil -- and maybe for a number of other aspects of life as well?
I agree that volatility will be the watchword going forward. I voted for depression dropping oil prices to $50, albeit temporarily IMO, and with the caveat that a decline in the nominal price doesn't represent the underlying affordability picture in any case. However, I wouldn't agree with the phrasing that the price would settle there - that sounds like far too gentle a description for the fallout associated with demand destruction on that scale.
I see a tug of war between supply issues and demand issues, and though I think consumer demand destruction will come first, I can see plenty of reasons to predict supply disruption in the not too distant future. Ultimately, I think supply disruption will drive prices, but not in the short term IMO. In the longer term I can imagine consumer demand being replaced by military demand as supply disruption starts to bite.
Our ability to maintain our complex market and trading arrangements for oil are probably themselves dependent on the availability of cheap and reliable supplies of energy. IMO the risk of a global resource grab due to peak oil is high, and the result of that could be the loss of a global market for oil, as supplies would be tied up in bilateral contracts or fought over with concommittant destruction of infrastructure. Energy supplies would be neither cheap nor reliable under such circumstances.
The backlash against the perpetrators would probably be significant, as people priced out of the market for an essential commodity are not likely to take it lying down. We could see sabotage, terrorism, and piracy by people with little to lose. Price could vary significantly in both space and time, although I think the overall trend will be toward a much higher price in the long term. Against a deflationary backdrop, a rising price in nominal terms would mean a skyrocketing price in real terms.
"I can imagine consumer demand being replaced by military demand as supply disruption starts to bite."
Their strategy is always the same:
http://www.zeitgeistmovie.com/
Interesting movie, but I wonder why the attack on religion was necessary. I think that peak-oil will likely put an end to globalization. The Amero is non-existant so far, and there are constitutional contraints to its creation. The SPP site: http://www.spp.gov/myths_vs_facts.asp addresses many of the things that Lou Dobbs spoke about.
I surely hope we get supply issues first, solved by demand destruction.
Worst case IMHO would be to have demand destruction arising from the looming recession, as this would delay the widespread acceptance of peak oil.
What is currently emerging is worst case...
If we get a few years of recession we would hit the oil production limit on the falling side of the curve and we would have much less excess spending to cut, and much less time to the transition.
I hope we hit the limit on oil production soon, so that everyone will accept PO, and start the transition.
At our current situation I see no problems in reducing oil consumption 10%, and we are facing nearly flat production ahead. Not good, but manageable.
Hitting PO with less savings, less waste and a steeper falling oilproduction would be bad.
Rune
Won't recession make our economic woes worse? When do troubles with derivatives float to the surface? Will $50 oil reduce oil supply? We talk about recession as a temporary correction to a healthy market. Is the market healthy? Is this coming recession a correction, or has the "long emergency" arrived?
The solutions the PTBs want to impose make the situation worse, almost without exception. That delegitimizes government, no matter if martial law is declared or not.
Of the hundreds speaking yesterday in Portland Maine for and against Plum Creek's massive development in our unorganized territories, only a small handful of us made the case that global issues - climate change and resource depletion - dictated that the LURC commissioners stop the project.
I made the even more esoteric case that LURC had no authority to destroy the planet and the web of life, that they had no authority to delegate that destruction to Plum Creek or any other corporation, and that if they don't stop this, the largest ever development, when? That knowing the science behind global climate change and resource depletion, they must realize that they exceed their jurisdiction by doing anything other than stopping the project.
Ungovernable, yes. Our laws probably say they have to approve the project. Commissioners and Governers need to start breaking those laws if they intend to maintain any sort of social contract.
cfm in Gray, ME
There's really no way for oil prices to drop down to $50 after peak unless we have a global collapse IMO. Even a severe recession in the USA wouldn't cause prices to drop much because the Chinese would buy the excess. And a global collapse would be so catastrophic I doubt you'd have any real global trade in oil at all so you still wouldn't see a "market" price of $50.
Capitalism can't run in reverse. Our social safety nets can't handle millions and millions of unemployed/homeless people. And its not like people can go back to the family farm like they did during the depression. There's no farm to go to.
A global collapse that would lead to a large price reduction therefore means complete social breakdown and dieoff (e.g. people shooting each other over heads of lettuce, etc.). Or it means a global WW3 with WMD. Either way there would no longer be a real oil market. So I expect to see oil prices continue to rise - until we reach such a collapse.