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23 comments on The Month of the Psychological Shock (Over Oil) in America?
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23 comments on The Month of the Psychological Shock (Over Oil) in America?
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A fair article. He misses one important point about exporters' oil production, though: that even if they can increase production, they might not want to. If you can sell 500,000 barrels a day for $100 each or 1 million barrels a day for $50 each, you'll be sensible to prefer the first, since your oil will not last forever, you may as well get as much money out of it as you can. The Middle Eastern exporters, at least, have few other resources and products they can export.
The only thing against this is that if oil is too scarce on the world market and expensive, it encourages people to conserve and look for alternatives. Saudi Arabia doesn't want Australia to stop using oil any more than Australia wants China to stop using coal, or the US wants Mexicans to stop eating corn, or Ghanans want the EU to stop drinking coffee.
So they must balance making the most money for the most time from their depleting resource against not encouraging their trade partners to conserve or seek alternatives. The current US, EU and Australian governments make this easy - we're not keen on the alternatives, we want to keep on truckin'. Which leads to the old and simple issue: if demand rises and supply can't, price rises. An issue which is a bit murky to the average economist, I know - but there you go.
“The only thing against this is that if oil is too scarce on the world market and expensive, it encourages people to conserve and look for alternatives. Saudi Arabia doesn't want Australia to stop using oil any more than Australia wants China to stop using coal, or the US wants Mexicans to stop eating corn, or Ghanans want the EU to stop drinking coffee. “ Posted by Kiashu
But maybe the exporters have finally realized that they have nothing to fear from “alternative energies.” If they are at or near Peak, the Saudis surely know that it will be absolutely impossible for wind and solar to be expanded on the enormous scale needed even to provide any substantial supply of electricity that still would be less than to-day’s output. I’m sure the Saudis are also aware of the general worthlessness of Ethanol and biofuels in general, and that most other technologies are either in the lab or extant only as a “demo”; thus, even under the most realistically optimistic scenarios several decades away from large scale commercial production. And other than biofuels, virtually all the alternative energies produce only electricity, which, while we will need all we can get, is not a liquid fuel especially convenient for transportation. So I think they realize that their oil will ALWAYS be in demand, and at ever higher prices; naturally they’d want to make the bonanza last as long as possible. And when supply gets REALLY tight, they can blame the producers of the alternative energies for failing to live up to whatever hype they have put out in their marketing campaigns.
Antoinetta III
I hope the Saudis and the Ibn Bush were smart enough to jack the price of oil up while there was still time to develop substitutes. It's really going to hurt if the reason prices are going up is because there really isn't any more oil.
Antoinetta III says,
"So I think they realize that their oil will ALWAYS be in demand, and at ever higher prices; naturally they’d want to make the bonanza last as long as possible."
Indeed oil will always be in demand, but how much oil? If we make the assumption that demand can go to 120 million barrels per day (and production can match that) by 2030 as the EIA of the U.S. Department of Energy and the NPC (National Petroleum Council) does, we must be assuming a massive increase in infrastructure in the oil E&P (Exploration and Production), refining and transporting sectors. Who is going to take the risk of footing that bill if they cannot be sure that the demand will indeed be there (remember, we are talking 22 years)? Recall that oil was pushed out of the electric power generation business in barely over a decade. It has been virtually pushed out of the home heating market in barely over that. Oil now has to rely on transportation demand to assure that it has a market, and if it can be pushed out of that market, or reduced to insignificance in the transportation sector, then the builders and investors of the giant infrastructure system built to increase production from 85 million barrels per day to 120 would potentially lose trillions (yes, trillions, using numbers provided by Matthew Simmons and others).
No one knows this better than the Saudi's, who are showing themselves not to be willing to make such a mammoth investment without some type of "demand assurance". They see batteries and plug hybrid technology racing ahead (I know technology is viewed as a joke by most TOD posters but the Saudi's take it seriously, after all, it made them what they are, a world power player), they see carbon limits being discussed and carbon taxes being proposed, and they see continents like Europe essentially declaring a quiet financial war on oil consumption.
In the meantime, the Americans are loathe to pay a bit extra per gallon to help fund the mammoth expenditure needed to raise oil production. All this is premised on the assumption that the oil is out there to produce, but really, it doesn't matter one way or the other if no one is willing to pay to produce it! Peak money long before peak oil...
For reference to Saudi public comments on the demand side issue, see the one key post I have written for TOD,
"A Tale of Two Speeches--OPEC's Demand Side Fear Is Very Real"
http://www.theoildrum.com/node/2978
RC
RC, I'm going on the assumption that we are at or near peak and that the reason investment in exploration and drilling is low is because it is unlikely there are any large finds left. Certainly no one wants to invest in a bunch of dry holes, in oil that cannot be produced because it does not exist, at least not in any large, easily accessible agglomeration.
And I don't think many people feel that any combination of "renewable" or alternative energies can scale up at a rate fast enough to at least keep up with the ongoing declines in overall production.
So I see the Saudis and the other exporters with declining production continually exporting less and less, but at ever higher prices. This is the first part of Westexas' breakdown, where the exporters will still see increasing income in spite of declining exports. Westexas suggests a point where their exports will decline that the cash flow will also, but I suspect that this will come quite late in the game, if it does at all.
Actually, I suspect that we will blunder along as we have, with oil prices swing up and down, but mostly up, with shortages and crises cropping up more and more frequently and working up the worldwide economic food chain. I can see this continuing for 2-7 years; at some point in this timeframe it will become clear that we are not only post-peak, but a critical mass of the investor/financial world will realize that the 200+ years of more or less continuous economic growth is over, forever. Markets will crash and a worldwide depression would ensue. Oil might go to $5 bucks a barrel, but at that point it won't matter, as $5 then would likely be the equivalent of $500 now. And in seven, or even ten years time, there is nothing that alternative energies, electric cars, hybrids, etc. will be able to do avert any of this.
If the Saudis are afraid of electric cars, battery tech, hybrids, etc., then they are afraid of shadows.
Antoinetta III
I would have agreed with you even a month or two ago, but I'm starting to believe the effects on aggrigate oil demand shown recently will help us pull through the next 5 or so years until real alternative tech really becomes competitive and available. Truck and SUV sales have been shreaded, the airlines can't seem to lay people off fast enough, vehicle miles are declining even as public transportation ridership is rising tremendously fast, while small cars and particulaherly hybrid sales have exploded. Also developing countries are finally reconsidering their fuel subsidies, which is just as encouraging as US demand destruction.
But why should oil producing countries suppose that the price of oil is only to get higher?
If a depression happens (and it could at any moment) in my opinion oil has no limits (downwards).
There are many parallels with 1929. Which I find most striking - the upper 1% of people in USA has something like half of all capital again after 1929.
It seems logical: elite needs happy herds only to accumulate wealth. once accumulating wealth on the shoulders of middle class is not possible anyomore, why would elites bother about middle class?
and you can't get that much anyomore, when you already have everything
The price of oil might fall soon. After all, we can only buy oil with money we borrow. If we can't borrow money, we can't buy oil, we stop importing oil, 12 million barrels a day of demand vanishes from the oil market, and Saudi Arabia, Iran, and Kuwait all stop exporting oil!
that sounds realistic..
Oh yeah, we're just going to stop importing oil and teach those Saudi bitches a thing or two!! I can see them shaking in their bathrobes now. from laughter.
The last times that the elites failed to take account of the middle classes, they ended up having to deal with people like these:
Arras, Robspierre, Danton , Marat, Lenin, Trotsky...
The world consumed more oil in 1939 than it did in 1929. A depression may cause consumption to decline a little, for a while, but it is not clear that it will cause consumption to decline faster than depletion. In addition, some of the oil that is being produced now is very expensive to produce. As prices go down, that production will come off line. A depression is also likely to increase political instability, further depressing production, if it does not lead to outright warfare.
Surely that indicates that to depress oil depletion then you would need a greater depression than the 30's, as supply and demand are going to be equal.
Counteracting that though somewhat is that AFAIK oil did not get more expensive in the 30's, and so there was less incentive to conserve.
I think you correctly point out two parts of the price/transition equation, but perhaps all can't make the connection.
The "gouging through prices" capability of oil exporting nations seems to be a function of available pre-peak production capacity and market awareness of the peak.
Hence, the oil exporting nations want to keep the oil using nations fully supplied at a comfortable price level, in order to discourage them from transitioning to alternatives (in any significant quantity, assuming now that alternatives do exist).
However, this only applies as long as the importing nations believe that the exporters have ability to export for as long as possible (i.e. "peak is still 30-50 years away" belief). If exporters let importers know that exporters are near production peak, importers will scramble to transition to any available source. This may remove much of the scarcity power from oil exporters.
So, oil exporting nations can NOT freely gouge the importing nations at any desired price level. Their scarcity power appears to be dependent on a wide assumption of very late peak AND lack of near term alternatives for importers to transition to. Even then the gouging can only be applied up to a point.
Summa summarum: there is considerable reason to believe that oil exporting nations are not (only) happy to see $130/barrel level oil prices, because it risks the pricing power of their remaining oil reserves, if importers start an early transition to alternatives.
Of course, this reasoning assumes that the peak is late and that oil exporters still have plenty of remaining reserves. If the peak is now, then they have all the reason to start gouging to the max, as any meaningful (ordered) transition to alternatives will take 20-50 years at the very least. Plenty of oil can be sold throughout that time at exorbitant price levels.
So, the questions remains:
Then who is lying and about which facts?
When trying to answer that question, keep in mind that:
(SamuM)
Clearly we are at price levels where the world economy is hurting, unfortunately lots of talk but very little action as far as transitioning. Countries with high gasoline/diesel taxes have moved further towards conserving liquid fuels, and will be better able to absorb the future large increases in price. Unfortunately the US has one of the lowest average fuel economy vehicle fleets and will have to move faster to reduce oil use. On the positive side they have very large electricity capacity 2 to 3 times larger than most developed countries so have the capacity to move to primarily electric powered vehicles. The other big advantage is the relative large number of vehicles per family, at least some of which have high mpg, allowing room to retire ( or scrap) the lowest economy vehicles or use them only occasionally.
Its hard to feel sorry for a new SUV owner complaining about $4 gallon gasoline when he is still paying much more on payments, insurance and depreciation, but easy to understand. Now at $12 a gallon, that same owner may well stop complaining and sell it or convert to CNG or electric or buy an older used high mpg vehicle. Of course some SUV owners don't drive very big distances(mainly to and from school/stores) so will just complain even at $12 a gallon gasoline until the next vehicle purchase.
http://www.ireport.com/docs/DOC-30851
Couldn't agree more. I just did my small part by posting a graphic, I recently created, on CNN. They had people post pictures of their SUV's and defend their reasons for driving them forever...I of course had a different take.
And don't forget wealthier people can simply buy a second or third more efficient vehicle for driving around, keeping the SUV for when needed. I've been seeing some of that where I live. High gas prices don't bother them. It's the poorer folks who get screwed because they can't afford a shiny new car every couple of years.
Rich people will always have a way to do things that mere mortals do not. Nothing changes in that respect.
Poor, however, are not directly hit by rising gas prices. Really poor do NOT drive to begin with (well may be they do in USA, but not in the rest of the world). Poor driving and being hit directly by rising gas prices is a myth, based on the assumption that poor drive. Poor are mostly hit through secondary effects through the rise in food prices and general inflation.
That leaves the middle-class. Us. The big consuming masses.
We're rightly hit by rising oil prices and we are unlikely to change our ways unless constrained by price and availability.
My premise for a while has been that the very nature of forced energy conservation requires an accelerating rate of increase in oil prices.
I am of course assuming an accelerating net oil export decline rate. Let's take all consumers in all oil importing countries and break them into five groups, ranked by income, from lowest to highest. At the bottom of the bottom quintile, we have a poor Third World consumer. At the top of the top quintile, we have Bill Gates,
Each successively higher quintile has vastly more purchasing power than the lower quintile, and energy expenditures as a percentage of incomes tend to decline as we move up the food chain, and each higher quintile has a lot more discretionary spending that can be shifted to non-discretionary food & energy spending, as food & energy prices increase.
This would seem to suggest a requirement for an accelerating rate of increase in oil prices in order to balance demand against an accelerating net export decline rate.
westexas
SamuM said:
Does this information is taken in account in the ELM? In what way this can change the oil export decline rate?
Taken this in consideration and supposing that Peakoil hits MSM worldwide and that the public opinion of those exporting countries demand conservation of oil reserves (for instances, the winter in Russia and Norway is quite cold), the 2031 zero oil net export prevision can take place much sooner.
MetaPico
I made the same observation the other day -for example Jeffs ELM model predicts Norway and Russia to goto0 ~2023 but IMO once the 'cat is out the bag' and the energy crisis is well underway these countries will be forced towards Resource Nationalism well before this date.
The question is at which point between now and 0 NET exports do they start to do something we won't like one little bit?
Nick.
My own expectation for the US is that gas will eventually be rationed using a two tier price system: Level 1 - Say gas @$6.00/gallon with a limit of 10 gallons per licensed driver per week. And, Level 2 - gas @$9/gallon with unlimited purchases allowed.
To me, this might make both the middle and lower classes happy since their gas is "subsidized" in price while allowing the rich to have all the gas they want. Naturally, there would also be a trading system to allow unused subsidized gas credits to be traded.
Todd
Dec12th 2015, News just in: Black Market traded gas futures have just gone into Contango!