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Updating oil price graphs
Posted by Stuart Staniford on April 24, 2006 - 12:18pm
Topic: Demand/Consumption
Tags: oil prices, peak oil, vmt [list all tags]
Seems like an interesting time to update some oil price graphs again.
Last time I got around to covering it, on January 20th, it meant we were within a week and and a couple of bucks of topping out, before going into a $10 decline for a month. After that bottom, we started up into the rally that's been going on until now. My guess is it's starting to get ripe for for a correction again unless we really do bomb Iran.
I had predicted at the beginning of the year that prices in 2006 would be $65 ± $20 in the absence of a major oil shock. I'm sticking to my story for now.
Right. Daily closing price of West Texas Intermediate. 2002-present. Expressed in then current US dollars. Source: EIA. Click to enlarge.
Average weekly price of all oil grades weighted by export volume of each, together with daily price of West Texas Intermediate. 1997-present. Expressed in then current US dollars. Source: EIA, and also here for the world data. Click to enlarge.
Here's the history from the beginning of 1997 on. The purple line is the daily spot price of WTI - West Texas Intermediate (Freight-on-board in Oklahoma - ie you have to pay for the shipping on top of this). The green line is the weekly average closing spot price of all grades of oil around the world. The EIA weights each grade according to how much is exported globally. This line is probably a more realistic measure of the oil price forcing function on the world economy, since it includes all the heavy grades in a reasonable proportion according to how much of them is being exported. However, WTI is the price that is often quoted in the US media (though the front month contract on NYMEX for light sweet crude is also quoted often).
According to Econophysicist Didier Sornette, one signature of a bubble is that the price rise starts to go superexponential. This has happened in US house prices in the last few years. The following quick and dirty study suggests oil prices have not got bubbly yet:
Average weekly price of all oil grades weighted by export volume of each, together with daily price of West Texas Intermediate. 1997-present. Expressed in then current US dollars. Source: EIA, and also here for the world data. Click to enlarge.
Optical illusion, I suppose..?
I want to repeat an example I used in another post on TOD, and re-ask the question:
Is crude oil and gasoline really that expensive?
My father commuted 21 miles each way per day in the 1970's energy crisis and seldom complained. Inflation adjusted oil prices were higher then than now, even at the current record $75 a barrel. Divide the per price barrel by what the average income was then...I made $1.50 an hour when oil went over $30 dollars a barrel in the late 1970's, or twenty hours a barrel. Now, at only $75 a barrel, most folks make over $7.50 dollars an hour, which would be only ten hours per barrel. If you make $15 dollars an hour, that's 5 hours per barrel. Why was my father so nonchalant about gas prices? He was getting 50 miles per gallon. Not only that, he was burning Diesel, in a Volkswagen Rabbit Diesel. He moved to it after having driven an Oldsmobile 98 for years...his fuel costs actually went down, while the cost of oil went up!
There is a serious problem of logic for any proponent to have to argue when trying to explain the absolute certainty of "Peak Oil" occuring either in the past or in the very immediate future to someone of a clever mind:
They will ask as a first question, "If that's true, why isn't gas and oil higher in price, in fact, WAY HIGHER?
This is difficult to explain. So to turn a question asked earlier on TOD, in another string, Instead of asking, "Why has gasoline risen so high?", let's ask it the other way around: "Why isn't gasoline far, far more expensive?"
If there is even so much as 30% chance we at the point (or past it) of sustainable oil production, the gasoline should be extremely high in price, at least as high as European prices, and European prices, given the PROVEN peak (and very rapid depletion) of Atlantic North Sea production, should be FANTASTICALLY higher.
Likewise, any competitive replacement, i.e., natural gas. It is high, but not nearly as high as one would expect in a real "Peak" scenario. And one more thing: In a true "Peak" scenario, there should be little fear, as there obviously still is, of a massive downward correction. All the corrections would have to be UP, and UP BIG. But even confirmed "peak aware" folks still speak of possible downward corrections, possibly of fair sized magnitude, as though the "market" in oil is still like the market in stocks or houses, rational, and with room to spare in both directions....in other words, just a routine "auction" type market? Is that really believable in a true catastrophic "Peak" energy scenario. (and by the way, where is the hoarding one should see at the point of "Peak" oil? It should begin soon if realization of a runaway demand exceeding dropping supply takes hold. Do we have evidence of hoarding yet?
I say this not to argue against "Peak" but to ask why the "price signal" is a complete failure at such a potentially historic moment. The implications of this pricing problem could be very foreboding, because if the price is being somehow artificially detached from real information, then when the "real" price has to be unleashed, it could happen VERY fast and with a magnitude that will stun the public and the system. Of course, that's the argument of those who believe in a severe collapse. Combine that with Matt Simmons warnings based on the fast top and rapid depletion curve, the warnings in the Hersch report, and you get virtually no forward warning from current price signals.
The only way the price can be maintained at this level must be (and I am playing through the possibilities here, please give more if you can find and argue for them) (a) currency being artificially strenthened to maintain artificially high purchasing power of gas/oil. (b)military force being of such magnitude that we are effectively "enforcing" our price (c) markets operating in the dark on false and or "stacked" statistics (ala Enron type accounting) showing that somehow the oil and gas is still out there and easily recovered with a bit more investment (d) Peak Oil is either a fallacy or far in the future (we have to admit that possibility if we are to do an honest evaluation and prepare properly)
O.k., give me your best! Which is it?
You have to separate taxes from European prices before you compare them alongside American one's. If you want to relate prices to peak-oil, you should probably just be looking at wholesale prices. Gasoline is also only indirectly involved with peak oil, which is of course about oil.
As far as prices being "fantastically" higher, we just don't know. This is uncharted territory. We'll only have some of these answers looking back.
In your last paragraph, it is hard to answer these questions because I don't dont know what you mean by,"...maintained at this level..." Is that a high level or low level?
I think it is hard to artificially strengthen a currency on the scale you suggest for a significant amount of time. I don't think you can enforce the price militarily. I don't think markets are operating in the dark. Peak oil is a lot of different things to a lot of different people. When you give me a one paragraph definition, I'll tell you if I think you're right or not :-)
A.Peak Oil falls into three (3) catagories all of which are directly related to a geologic peak. These are:
1.Feild peak extraction (FPE)(by which is meant pulling out, pumping out, forcing out or otherwise retaining crude oil to the surface of the earth before that product becomes part of a specific nation's physically exportable limit. {The ammount currently available for export but held back or otherwise consummed by that country domestically. Further, marine terminal limitations will also impinge upon a givin nation and their ability to either get it in the pipeline or aboard a Tanker (VLCC)}
2. Cummulative Rig maximum output: Derived from the sum total of production of crude oil possible for a givin feild during its moment of highest output. CRM is not theoretical it is demonstrated and like all good science experiments it is repeatable otherwise the feild or well or series of wells extracting from a givin feild are past Peak Oil and are in decline.
3. Maximum country production capability(MCPC): This figure in Mbd is derived from either Feild(s)peak extraction (FPE)or(CRM)or a combination of both. Domestic use before export is NOT a factor in Country or feild peak oil production.
For sake of discussions "Peak Oil production exported" (POPE) to the rest of the world is the maximum demonstratable ammount of oil in the tube or on the vessel over time (month/day/year). It is independent of domestic use but is of course subject to it because POPE = MCPC- domestice use.
Further sake of discussion: Global demand has impact on the study of peak oil because market conditions as they move to the back side of the cliff may be mitigated by efforts derived from the study of market fluctuations during other non-peak times. However; demand has nothing to do with rig, feild and country peak production (These are internal and physical limitations not subject to the vagarities of demand) and export which may be influenced by demand but this does not necessarily need to be so. Study should not be inclined to discount the ability of Net exporting countries to decrease their domestic allowance wether by market or political forces. Market forces can only look upon events ex post facto. Otherwise they are speculative forces impacting upon a market.
Opinions: No ammount of graphing and analysis of oil price or gas price over time will indicate (exponential or not) arrival of "Peak Oil" in total or country or world peak oil pruduction(X)Mbd. Price is derived from supply and demand and other factors not the other war around. Prices may certianly demonstrate that Peak oil has arrived and market forces are looking at the peak in time past.
I don't think the oil markets understand peak oil yet. I don't think that there is a severe shortage of supply yet. We can't tell if we are at peak yet. There is probably the capability to raise production to over 90 mbpd as Chris Skrebowski's (optimistic) megaprojects update would suggest but I think it more likely that we never really get much higher than we are now.
I think we are in a waiting game to see what demand does, and what crisis happen in oil producing countries.
Its pretty horrifying to think of a few badly placed hurricanes and Iran even reducing production, let alone military action.
I think the price is somewhat detached from reality and when demand truly exceeds supply that it will escalate extremely rapidly.
We might be fortunate enough that somehow someday soon the US economy could take a turn for the worse and consume something closer to the global average of 4.8 bbl per person per year instead of 25. If US oil consumption could decline to maintain no supply shortage until they no longer import at all, that would suit the world just fine. If the US didn't import any oil and just consumed domestic production then they would consume the same per capita as the UK.
If I drive 40 miles a day to get to work and back, 5 days a week, 50 weeks a year that's 385 gallons of gas at 26mpg. Thats 9 barrels of gas per year already assuming nobody else is in my car, most of the people I know drive solo to work and back. Its so crazy to think that people elsewhere on the planet might be seeking this lifestyle when it just isn't gonna happen for anyone else. I don't know what the average distance is in the US for people to get to work but my friends here in KC drive at least 40 miles a day.
After having been involved in the markets a great deal my vote would go to "C". Most investors are in the dark to the full extent to which the gap between supply and demand for oil will grow.
Secondly, because the market is made up of hundreds and thousands of individuals, the market does not sharply rise or fall with out BIG news to influence the crowd. That is some Investors may be catching on to the facts about peak oil, however, at the same time if they are wrong about peak oil they do not want to be caught in a price bubble and lose money. So most of them are playing it safe. Testing the waters if you will.
This is evidenced by the chart above with annual price comparison. Investors will bid up the price of oil 20% then, back off for a while and take some profits. After 3 to 6 months investors will test new record highs and push the price of oil up again, it goes in a fairly predictable cycle. This just happened in the last couple of weeks. The market had a physiological ceiling of $70 per barrel, however once this barrier was broken the price was free to rise to $75. The price may dip down again however now that oil has crossed $70 per barrel, there is no longer the physiological ceiling. A new ceiling might have just been created at $75 and maybe a couple of months from now in August investors will push it to $80 ceiling.
In stock market theory this is referred to as the "Tea Cup Chart". That is "A strong stock's price will Rise, Stabilize, Rise Higher, Stabilize, and Rise again Etc...
My central point is that prices will continue to rise as more and more investors test the waters of the peak oil theory. This will allow the price to slowly rise, reflecting the growing understanding of the situation. The only way I see a huge $200 price jump in a short period of time, due to knowledge of "peak oil". Is if the president called a oval office speech and explained the whole "Peak Oil Theory" situation to the American public on prime time TV. Then he would need to call in a panel of Bi-Partisan oil experts to witness to a study of the theory they had just completed, finding it completely correct and more then that, they found it was far to late to do anything about it. However I don't see that happening any time soon.
In a way it could be argued that public and investor ignorance of Peak Oil is the only thing saving us from a panic reaction that would crash the markets and destroy any chance of a transition to coal liquidation, shale oil, and massive amounts of solar power. The economy can not handle a shock of $300 per barrel over night, however if you spread that same rise to $300 over a 10 year period the impact is manageable and it gives time for businesses to adjust to a new model.
Of course this means that the sellers of Oil are not getting, what the oil is truly worth in the long term, however this is a better alternative then a Great Depression to end all depressions, in the next 10 years.
And I thought "ignorance is bliss" was just a cliché saying.
However, 'events' or 'surprises' could come along and upset our delicately balanced 'apple cart' sending oil prices through the roof, with 'catastrofic' results. I think Dan Simmons is concerned about this unsettling prospect in relation to Saudi Arabia, and the possibility that they may have 'damaged' their major fields and production could fall drastically, triggering the 'panic market reaction' and price explosion he fears.
Dan Simmons is the author of the Hyperion series, the greatest science fiction of all time. You probably meant Matthew Simmons. :^)
RR
:)
Price only reflects the true supply if the buyers and sellers have perfect knowledge. Which they most definitely do not.
Don't worry, prices will go back down any day now. Or so this guy says.
In 2002 I was visiting my father, an old oil man, who told me there's no reason to want to get back into oil at the moment - besides, everyone else is getting out. That was my first clue that "oil's not well" - a sure clue that the markets were about to change. Even back then it was hard to get a rig if you wanted to drill...
Following is an excerpt from my Energy Bulletin article on the MSM and Oil Prices
http://www.energybulletin.net/15126.html
Why Aren't the MSM Discussing the Import Situation?
I think that we are seeing an "Iron Triangle" of sorts defending the status quo concept of ever expanding energy supplies: (1) most housing, auto, financing and related companies; (2) Most MSM companies that are selling advertising to Group #1 and (3) some major oil companies, major oil exporters and energy analysts that are working for the major oil companies and exporters.
The housing/auto group wants to keep selling and financing large homes and SUV's.
The MSM wants to keep selling advertising to the housing/auto group.
In my opinion, some major oil companies are afraid of punitive taxation, and some exporters are afraid of military takeovers. This group of oil companies, exporters and their analysts provide the intellectual ammunition for the other two groups, i.e., promising trillions and trillions of barrels of conventional and nonconventional oil reserves."
I listened to part of Ed Wallace's local Dallas/Fort Worth (auto related) radio show yesterday. Mr. Wallace by the way has an article coming out in Business Week on ethanol.
In any case, the show yesterday had all three elements of the "Iron Triangle." Mr. Wallace started off with a long discourse on a speech last week by Lee Raymond, retired CEO of ExxonMobil, to the effect that the recent run up in oil prices was temporary and that the market would adjust, more supply would appear and prices would fall.
So, we had the ExxonMobil guy providing the intellectual ammunition.
The journalist took Raymond's comments and ran with it, asserting that the price run up in temporary.
And all of the advertisements were by auto dealers, trying to sell and finance cars.
So, who ya gonna believe? The sour pussed guy that tells you that you might as well start cutting back on your expenditures (energy and otherwise), get out of debt, look into organic gardening, or the guy that tells you that soon you can resume your blissful hour long commutes in your $50,000 SUV and from your $500,000 mortgage?
Mr. Wallace went on to assert that Peak Oil would not occur for 50 to 80 years, because conventional reserves were 50% greater than expected (three trillion total) and because of trillions of barrels of nonconventional oil.
This may be part of the reason for the political inertia so far. Hopefully, as more people become aware of the situaion they will attract the attention of politions. The recent activity in Washington surrounding immigration being an example.
It also may mean that these folks, who tend to be investors, as they gain awareness, may continue giving upward impetus to the price of energy companies.
I give this white paper, with more detail, for people who want to know more.
In Texas and the Lower 48, once we hit about 50% of the Qt mark, price had essentially no discernible impact on conventional oil supplies. As I have documented many times, using the Texas case one could assert that rising oil prices correlate to falling production. Of course, the reality is that the smaller fields we found post-peak could not make up for the declines from the large, old fields.
I continue to believe that the Lower 48 and the North Sea are our two "cleanest" HL (Hubbert Linearization) case histories. The Lower 48 peaked just slightly less than 50% and the North Sea peaked at just slightly more than 50% (crude + condensate)--and production has not increased since peaking. Deffeyes asserts that we are past the 50% of (crude + condensate) Qt mark worldwide.
Look at the ages of the large fields in the top two exporters SAR (Saudi Arabia/Russia) and the top two importers USC (United States/China). All of the large fields are old, and consumption in all four countries is growing, in some cases quite rapdily. Anyone think that this is a stable situation?
IMO, in the first quarter of this year demand for crude + condensate exceeded supply, and we are meeting the demand by drawing down inventories. The best short term data in the world appear to be the weekly and monthly EIA data (a case of damning with faint praise). In any case, the weekly data since February show much sharper declines of total petroleum imports than is normal.
What I found odd is the combination of rising light, sweet crude oil prices and falling imports.
Most of the MSM are attributing the price increase to speculators and geopolitical tensions. I disagree. I think that we are in the early stages of a bidding war between importers for rapidly declining net export capacity. Nonconventional production will help, but IMO it will only serve to slow the rate of decline of total oil production. IMO, from the first quarter of 2006 forward, the total net energy supply will decline until the rate of growth of alternative energy is equal to the rate of decline of conventional energy.
IMO, oil prices would be higher were it not for a coordinated effort by the "Iron Triangle," who have a masssive vested financial interest in the status quo concept of constantly increasing energy supplies.
So, a lot of energy consumers are going deeper into debt in order to try to hold on to their current energy intensive lifestyles.
Longer term, when the reality of Peak Oil becomes apparent to even Daniel Yergin, the irony is that it is people like Lee Raymond, Daniel Yergin and the journalists in the MSM, who are actually going to cause demand--and thus prices--to be higher than they would otherwise be, because they are, in effect, telling us today that there is no problem with the $50,000 SUV and $500,000 mortgage way of life.
If you believe the Peak Oil guys, you cut spending, get out of debt, and live much closer to where you work--which is precisely what the Iron Triangle does not want you to do.
If you follow the Peak Oil guys advice, tomorrow, if the Peak Oil guys are wrong, you will have less debt, more money in the bank and a lower stress lifestyle. If the Iron Triangle guys are wrong, you could end up bankrupt--except of course that it is quite difficult to file for bankruptcy, now, courtesy of our Iron Triangle friends.
Still, it probably is ironically helpful to have the realization dawn slowly as a poster above noticed. The panic of $300/bbl oil would create "collateral damage." I am pessimistic about the possibility of any of the orderly transitions suggested by Hirsh being implemented, even if it weren't too late, and it may not be. It is too late to do it without a lot of pain, but democracies don't accept pain without really compelling reasons. The UAW has accepted some (fairly small IMO) reductions in benefits as Ford and GM disintegrate, though.
Like the Iron Triangle explanation and this re: oil prices.
Logical. Makes sense. god knows nothin else does.
Thanks