The Oil Drum

Its interesting the good agreement with the different curves.

Its also interesting that the switch to the new curve coincides with the end of the '06 summer bullrun and the disconnect seen in US pump price rises noted elsewhere.

I wonder if someone somewhere had a meeting.

PS the red curve says $150 before year end, easy

A very clever friend suggested I check that the red curve isn't a simple offset of the blue curve - I did, it isn't, the exponential function is definitely steeper.

The price behavior seems to defy economic sense. The price elasticity is getting LESS elastic as the price goes up rather than more elastic. It has also been more than 3 years since prices started to rise, so longer term elasticity should be kicking in. (and we have reports of record mass transit usage, so we know something is happening). But that is not slowing the price rise.

Worse, the world supposedly had a rise in oil production last fall/winter that broke the 2005 production numbers. Yet the price did not drop back to 2005 levels. No, that was in the middle of this rapid price increase.

Intuitively, what I feel is happening is that in 2002 - 2007 the poorer consumers were pushed out of the market. They had more elastic demand to oil price. Now that they are gone, wealthy consumers are the only ones left. USA, Europe, China. Those remaining are much less elastic.

I think we are going to see a sigmoid price response. Sigmoid Curve Shape

Where the top part of the curve is set by the maximum value for a barrel of oil. A rough estimate of the maximum value comes from GDP/Barrel of oil Equivalent energy consumption. Roughly $600.00 ($2006)

However, it takes about half the energy of a barrel of oil to use that oil (energy for extracting the oil, building the roads, building the cars, maintaining those cars) so at a price of $300 a customer would be trading back to the supplier the whole value they could expect to get from the oil.

I don't think that price can be sustained for long. It can only happen when subsidized by other energy sources. Or when the purchasing country starts selling off embodied energy to pay for the oil. (like selling banks and farmland etc).

What I feel this Post on Whale Oil is mostly saying, is that humanity has no models for what will happen as a major energy source depletes on a world wide scale. We have always had another (often better) choice. Now, at best, we have worse choices (electricity). And what will happen to the price will need to be determined by model rather than by analogy to past events.

The linear to exponential switch happens in 2002, a scant 2 years after the date Hubbert published for global peak production some 40 years ago.

Now try extrapolating Nortel stock from IPO to 1999.

I think your a tad low in the sense your not adjusting for inflation. Inflation adjusted your probably looking at 1200 in 2012 dollars. Other than that about right.

Interestingly, if you shift the 2007 onwards curve upwards to remove the 2006-2007 downwards blip - then you do get a continuous exponential, but with a slight excursion recently. $25-30 offset. The resulting curve shape with dates feels about right, with prices rising $100 a year by 2012.

There is a hypothesis that can be made about this. On an underlying basis as 'possible supply' and 'demand' meet there is an exponential price rise expectation as users fight it out for supply. The market however is very human, certainly far from perfect, and can react to sentiment to introduce shocks into the price curve, offsetting the progress of the underlying price rises. Similar events can be seen around points of recession - the curve trend shape on either side is the same, the period of the shock is chaotic.

Thus the expectation is defined by the general curve, with periods of chaotic drift before the curve re-establishes itself. When does it end? Well I'd suggest that once people realise the available supply is on the way down the rules of the game change and we get a discontinuity in the price curve. I wish I could say I think that's going to be a plateauing, but Instead I think it may well be an upwards jump as active hoarding begins.