Oil Prices and Economic Reality

There's no reason to panic about rising costs

Steve Chapman | May 29, 2008

Right now, energy consumers can only envy the Greek King Sisyphus. He was condemned by the gods to spend his life pushing a boulder up a hill, only to see it roll back down again. Motorists and other fuel users seem condemned to push uphill forever, with never a downward respite.

In the past year, world crude oil prices have risen like a bottle rocket. In the last year, they have doubled. Since February, they have gone from less than $90 a barrel to $135 a barrel—a level that was almost unimaginable at one time, like three months ago.

And some experts say that someday, we'll look back fondly to the days of $4-a-gallon gasoline. Famed oilman Boone Pickens is betting oil prices will reach $150 a barrel. Goldman Sachs analyst Arjun Murti, one of the few to anticipate the recent price surge, says they could reach $200. That would mean pump prices of $6 a gallon.

All this is the result, we are told, of a devilish convergence of forces: tight supplies, geopolitical uncertainty and booming demand in countries like China and India. Since none of these is likely to change, the upward trajectory of prices won't either.

At the risk of ending up on Pollyanna's Christmas card list, allow me to differ. Oil prices are unpredictable, particularly in the immediate future, and it's easy to think of events that could force them higher—like, say, a war between the United States and Iran. But in the long run, there is every reason to think that the steep, rocky ascent we have been on will give way to a welcome downhill path.

I'm not alone in my optimism. Michael Lynch, head of an energy consulting firm in Massachusetts, told the Associated Press the current price of gasoline "is the peak or very close to it." Analysts at the investment bank Lehman Brothers say we are just as likely to see oil at $80 a barrel as at $200.

It's easy to take a trend line as eternal fate. The oil market may look particularly inflexible, given the finite nature of fossil fuel deposits and the insatiable needs of growing economies. But two important things in the oil market can change. One is demand. The other is supply.

Demand here is already in full retreat. People are abandoning SUVs for hybrids, taking mass transit and even venturing out on foot. "The average American motorist is driving substantially fewer miles for the first time in 26 years," reported USA Today recently. "Miles driven in February declined 1.9 percent from February 2006 before rebounding slightly for a 0.3 percent year-over-year gain in March." And that was before gas got to $4 per gallon.

Americans are not the only influence on oil demand, but they're the biggest one. We consume a quarter of the world's annual supply—three times more than China and eight times more than India. So if our consumption starts falling and keeps falling, the petroleum sector will quickly feel the effects.

The common assumption is that oil use in China and India will soar no matter what. But even on the other side of the planet, demand is inversely related to price. Pump prices have risen in China, and if American motorists are cutting back on travel, you can bet that Chinese drivers are doing the same.

The supply of oil is also related to the amount it sells for. It's not getting easier to find new reserves, but at $130 a barrel, a lot of companies are going to be looking really, really hard. They will also be reevaluating fields that couldn't be profitably tapped at $60 a barrel. The federal Energy Information Administration projects that U.S. production will rise 24 percent in the next decade.

The same factors should boost output abroad. OPEC members will face far more temptation to cheat on their production limits. "This year will be a year in which supply will be put into the market by stealth by OPEC countries and countries we call black-hole countries" such as China, Lehman Brothers energy economist Edward Morse told The New York Times.

Back in the 1970s, everyone thought the world was running out of petroleum. But spurred by huge price increases, production rose even as demand was falling. Before long, the world was awash in cheap oil.

Don't be surprised if it happens again.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

Comments

jkp|5.29.08 @ 7:10AM|#

It's not a matter of panic, but there are many reasons to be concerned about the high price of oil, one of which is global stability. The 1973 oil shocks helped destroy the governments in some previously friendly countries -- Ethiopia and South Vietnam, among others. (Yes, yes, there were many forces at work in both of those cases. But skyrocketing oil prices were one of them.)

Chapman hopes that OPEC members will start cheating on the cartel. Eventually someone will -- if they can. If they can't, barring massive new easily-accessible discoveries, the price of oil can only go up.

Also, there is a certain point beyond which American motorists in current circumstances will be unable to cut back on consumption. People who live 30 miles out of town will still need to commute 60 miles/day for work. They'll either need to cut back on their other discretionary spending, or else move closer to the city. (Which, considering the idiotic levels of debt that some Americans have racked up in the past few years, may be difficult.)

This isn't a nightmare scenario, but it also isn't necessarily a rosy future, either. If all Chapman has to offer in his article is just blind hope ("Don't be surprised if it happens again,") well, that's not really much to hang your hat on. I mean, I hope he's right, but can't bank on it. I'm still looking to buy a house in the city, high taxes be damned.

|5.29.08 @ 7:26AM|#

There's also the effect that a recession in the USA will have on China; as we buy less from them because of the crashing dollar, their production will fall, and so will their energy consumption.

-jcr

|5.29.08 @ 8:10AM|#

I think the writer brings up some valid points. All I know is that I am tired of taking a hit each time I stop to fill up my jeep. Heck it cost $12 now to fill up my motorcycle! Something has GOT to give.

JJ
http://www.Ultimate-Anonymity.com

|5.29.08 @ 8:11AM|#

global stability

AAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHH!!!!!!!!!!!

I despise that argument. The whole "Team America: World Police" concept is built around it.

Fuck global stability.

Steve|5.29.08 @ 8:33AM|#

Two words:

PEAK OIL

|5.29.08 @ 8:38AM|#

previously friendly countries

friendly to whom?

|5.29.08 @ 8:50AM|#

For once, I actually think I mostly agree with Steve Chapman.

I think the demand retreat in the very near term will be slight, but will be perceived to be larger. This will help with casual speculators in commodity markets. Also, it's possible that a new president will be a major question mark in how oil will behave. My guess is that a McCain presidency will make oil worse, while an Obama presidency will have a more neutral effect.

There are 2 sectors of the driving population that need to be taken into consideration when considering where short-term gas demand is going to decrease.
1. The elderly
Many of these people should not be driving in the first place, but since they do, they drive large gas-guzzling Crown Victorias with the A/C cranked. If on a fixed income it becomes harder to drive, they will simply take shuttles or be holed up in their houses (depending on their living situations).
2. Teenagers/College Students
This group was already on the brink of not being able to afford to drive. The good times for them was in the late 90s when fuel was relatively cheap and their parents were relatively wealthy (or at least perceived themselves to be). Since most of them don't need a car, they will resort to other modes of transportation - primarily taking the bus to school and riding bicycles (which provide more freedom). Once a few kids start doing it, it will just spiral out of control. Also, kids have other things they'd rather spend their money on than $4 a gallon gas, like game consoles and other entertainment.

So in the short term, I expect to see a demand drop from these two demographics. If gas remains as high as it is, expect that living/working trends will change to result in a more structurally stable/permanent demand decrease. Only so much savings can be realized in efficiencies.

That's my story and I'm sticking to it.

|5.29.08 @ 8:54AM|#

I agree with Chapman (egads!). You also have to take into account the fact that the dollar is worth a lot less now than it was a little while ago.

|5.29.08 @ 8:56AM|#

Don't look too hard for the next oil crash. Geologists are very pessimistic now on future prospects and even with $200/bbl oil, the new reserves looking to be tapped are not very easy to tap (in situ shale oil, tar sands, biodiesels). Demand destruction will occur to a certain point, but that is the same as in the 70's. However, in the 70's, there was alot more slack to tighten up than there is now. We'll see some price relief if demand eases, but the new floor will be much higher as the margins for oil exploration decrease due to the basic cost of doing business (expense of other raw materials, more energy intensive processes to get oil). The EROI of easy oil was in the 30:1 range, the EROI's we're looking at for "new" oil is less than 5:1, some of them (in situ shale oil) close to 2:1, which is very slim indeed. For my part, I'm planning on reducing my travel as much as possible to compensate, but I am probably not as pinched as some people nowadays.

Rhywun|5.29.08 @ 8:58AM|#

I'm gonna go out on a limb and admit I haven't the slightest idea where oil is going to go--very theory seems to be backed up by solid evidence.

|5.29.08 @ 9:38AM|#

Don't forget about the Fed debauching the currency.

|5.29.08 @ 9:39AM|#

Oil prices -

Short term (< 5 years) - Your guess is a s good as mine. They won't remain the same. Price stability in oil is not a thing of the past, but it isn't going to settle out for quite some time.

Mid term - (5 - 10 years) $150-$200 (2008 dollars) a barrel with recessions keeping demand (and prices) from going through the roof.

Long term (> 10 years) up, up and up some more. Oil prices (2008 dollars) will rise to $250 - $350 a barrel, Adam Smith will do that voodoo that he always does, and alternate transportation energy source competition will prevent further massive inflation of oil prices.

It'll suck, expect a recession, but the industrial world will, as it always does, muddle through. Teenagers in the US will still cruise on Friday nights.

|5.29.08 @ 9:42AM|#

It amazes me how allegedly smart people continually forget the basic rule of supply and demand. I saw the same thing during the housing boom. People who are much smarter and better educated in economics than me told me with a straight face that housing would never be a bad investment and that housing prices would go up forever. The idea that significant numbers of people would eventually get priced out of the market and stop buying leaving the speculators out of luck never entered their minds.

World demand for oil is inelastic in the short term but it is not inelastic altogether. US demand for oil has already dropped 1% this year. Oil inventories are actually up. Gee, the price goes up and people buy less so a surplus develops what a concept. Further, people can and do immediately cut demand by driving less. But real changes in behavior take longer. You don't sell your car and buy a more efficient one the next day after gas hits four dollars a gallon. You don't move closer to your work the next day either. Those kind of behavioral changes take a while to kick in. But they do kick in eventually. There is nothing magic about China and India or the rest of the world. They respond to price just like the rest of us.

Of course it goes both ways to. Once oil drops you don't move further away from your job. If you are old enough, you probably know some people who traded in their big car for a Honda in about 1980 only to see gas drop shortly thereafter.

If you take out the effects of the weak dollar and speculation, the natural price of oil right now is probably about $90 a barrel. Give it a year or so of $130+ oil and the natural price of oil is going to start dropping because people's behaviors are going to change and demand is going to drop. Add to that the Fed finally waking up to the fact that they can't debase the currency forever and you have a recipe for what always happens in the oil industry; a bust. Give it a year or two and oil prices will bust. Not sure how low, but they will bust.

|5.29.08 @ 9:47AM|#

Once again, Steve Chapman phones it in. He doesn't go anywhere near digging through the relevant factors that will determine supply and demand. Sure two hundred dollar oil is great incentive to go looking for more fields, but you can't just pick up a deep sea rig off the shelf at the home depot. The infrastructure required to find, extract, and refine the quantities of oil required to move the market are MASSIVE. And the incentive of high profits is mitigated by the specter of tax, regulation, and even nationalization.

I agree that sooner or later, the market will respond, and bring oil down. How much later, and how high it will get before turning around, are another question.

|5.29.08 @ 9:49AM|#

It amazes me how allegedly smart people continually forget the basic rule of supply and demand.

A function of all financial bubbles is mental paralysis.

|5.29.08 @ 9:54AM|#

Warren,

We may have $200 oil, but if we do, it will make the bust that happens afterwards that much longer and that much steeper. We underestimate people's ability to change their behavior. Make gas $8 a gallon and few people will own anything but the most efficient cars or take long driving vacations. People in places like India and China who are now buying cars, will stop doing so and go back to horses and bicycles. Electric cars will become much more competetive. The world could get by on a hell of a lot less oil than it does. It just will just cost us more, but if oil remains this expensive, that is exactly what people will do.

|5.29.08 @ 9:54AM|#

Give it a year or so of $130+ oil and the natural price of oil is going to start dropping because people's behaviors are going to change and demand is going to drop.

A year or so? Maybe, but I'm thinking more like five or ten. Also, I'm not so sure the FED won't continue to debase the currency.

|5.29.08 @ 9:58AM|#

Also, I'm not so sure the FED won't continue to debase the currency.

I agree that the Fed is the biggest x-factor in this whole equation. They're truly messing things up right now.

|5.29.08 @ 10:00AM|#

Warren,


WASHINGTON, May 20 (UPI) -- Foreign oil imports fell in the United States in the first quarter of 2008, the U.S. Energy Information Administration said.

Foreign imports fell to 57.9 percent of the country's consumption, down from 58.2 percent a year ago.

http://www.upi.com/NewsTrack/Business/2008/05/20/us_demand_for_foreign_oil_drops/8166/

It happens quicker than you think.

|5.29.08 @ 10:01AM|#

but if oil remains this expensive...

That of course is the other dirty little secret. We're so use to oil being cheaper than dirt, we think it's expensive. You're claiming that high prices will result in less consumption. You are right of course, but the fact that consumption has not significantly dropped, shows just how cheap it has been. We are just now at the point were people are doing more than just bitching about the price at the pump.

|5.29.08 @ 10:05AM|#

Foreign imports fell to 57.9 percent of the country's consumption, down from 58.2 percent a year ago.

How is a drop in the relative ratio of Foreign vs. Domestic resource consumption relevant? It's only the aggregate consumption number that is relevant.

|5.29.08 @ 10:06AM|#

"Two bits of news make me hopeful that the US can reduce its demand for oil significantly in 2008 and beyond. The first is that jet fuel demand in April was the lowest in five years, due to the reduced flights after three US airlines folded earlier in the year and thousands of flights were canceled due to missed safety inspections. The second comes from automakers such as GM and Hyundai that are responding to the market by shifting their focus toward more fuel efficiency. Hyundai was about to introduce its first line of pickup trucks for the US market, but canceled the initiative on declining sales of such big vehicles throughout the country. GM announced a " dramatic redesign" of its marketing strategy toward fuel efficient vehicles after many months of bruising results from its focus on larger vehicles.

In this context, the IEA lowered its annual oil demand forecast for 2008 for the fourth straight month. After predicting demand growth over 2%, higher prices and economic deceleration have brought its projection down to ~1.2% or 1.2 million barrels per day (Mbd) to 86.8 Mbd. OECD countries are predicted to demand 200,000 fewer barrels per day this year (led by consumption decline in the US) while non-OECD countries increase their consumption by 1.4 Mbd."

http://www.igloo.org/dmarkatos/couldusdem

Forget peak oil, we have hit peak demand. People will not pay any price for oil. They will either find ways to replace it or the economy will just stop growing or some combination of both.

|5.29.08 @ 10:10AM|#

http://money.cnn.com/2008/05/28/markets/oil_prices/index.htm?cnn=yes

Try that link MP.

According to the Energy Information Administration (EIA), a unit of the U.S. Department of Energy, gasoline demand has fallen 0.6% so far in 2008. The trend began in October 2007, and gas consumption has trailed year-ago levels in every month since, except for a very slight bump up in November. As a result, the EIA is forecasting the first year-over-year decline in U.S. gasoline demand since 1991.

|5.29.08 @ 10:14AM|#

Warren -
I wouldn't argue that oil wasn't still "cheap" at $90 a barrel or $3 a gallon. $4 a gallon isn't prohibitive either (although I love reading about how people are "angry" about gas prices). People are not used to allocating as much of their income toward gas, and now food, as they previously did. The fact that it is still relatively cheap to other sources of energy does not make it something that people are willing to devote their whole paycheck to.

Demand is mostly inelastic in the short term, and more elastic over the long term, only the elasticity seems to be coming faster than many think.

|5.29.08 @ 10:15AM|#

Try that link MP.

Thanks. One thing I don't understand...if we're pissing and moaning about $130/barrel oil, and we're the richest country in the world, why isn't China and India screaming bloody murder? Shouldn't their demand increase have come to a halt at $100/barrel...or even less?

|5.29.08 @ 10:16AM|#

I have a feeling that the speculators shouting "peak oil" and bumping up the price by 30 percent in a couple weeks will soon have their asses handed to them. I'm not confident enough to short oil, however.

|5.29.08 @ 10:19AM|#

I haven't heard the barbers and mechanics bragging about the performance of their NYMEX oil futures yet, so maybe my prediction is premature.

|5.29.08 @ 10:21AM|#

"Thanks. One thing I don't understand...if we're pissing and moaning about $130/barrel oil, and we're the richest country in the world, why isn't China and India screaming bloody murder? Shouldn't their demand increase have come to a halt at $100/barrel...or even less?"

I think it is because they are a lot less developed than they are portrayed. Most people in those countries still don't own cars. Their lifestyle is still radically different than the US or Europe's.

|5.29.08 @ 10:26AM|#

I think it is because they are a lot less developed than they are portrayed. Most people in those countries still don't own cars. Their lifestyle is still radically different than the US or Europe's.

I agree with that. However, if a country is relatively undeveloped, shouldn't that make their oil demand even more elastic? If their expansion is on the back of cheap oil, shouldn't it grind to a complete halt once oil is no longer cheap? Where the hell is all this worldwide demand for $130/barrel coming from?

The Saudi's said that right now there is a massive demand/supply imbalance, with supply outpacing demand. Where are the fundamentals that justify the oil price run-up?

This whole thing reeks of a speculative bubble.

Guy Montag|5.29.08 @ 10:27AM|#

Chapman hopes that OPEC members will start cheating on the cartel.

That cartel ALWAYS cheats. So much so that almost the only effect that their announcements have is panic trading and political "do somethingness". You are pretty much guaranteed that if they say they are cutting back, the supply will increase.

MP,

I just read/heard recently that the Chinese government subsidizes fuel-at-the-pump (as opposed to the imagenary subsidies that US companies get, these are real).

Geotpf|5.29.08 @ 10:28AM|#

The figures John listed are for domestic demand, and are therefore meaningless. The only figures that matter in determining the price of oil are total worldwide demand. Anybody got those? It's quite possible domestic demand is dropping but worldwide demand is still rising, which will cause the price of oil to continue to rise.

Mike M.|5.29.08 @ 10:31AM|#

This whole thing reeks of a speculative bubble.

That's precisely what it is. Global commodity speculators are taking advantage of a little-known loophole in the law which allows them to use American terminals to trade on the London Stock Exchanges without leaving any real tracks.

Many of them are likely trying to hedge their bets against inflation and a weakening dollar, but a few big money boys are also likely doing it solely to try and manipulate the upcoming American elections.

Look for the big selloff to start shortly after the election is over, probably in the first quarter next year, and then everyone will slap their heads and realize how ridiculously obvious it all was.

|5.29.08 @ 10:34AM|#

I vote for bubble. The higher demand existed well before the price spike. I think some supply contraction helped to spark the rise, but it's way past what the market will bear. As one who predicted that the housing bubble would burst and burst big, I demand respect ☺

Just kidding. I only demand a cookie.

|5.29.08 @ 10:34AM|#

I just read/heard recently that the Chinese government subsidizes fuel-at-the-pump (as opposed to the imagenary subsidies that US companies get, these are real).

A lot of Asian countries have various direct subsidies. But how long can they afford to do them?

It's quite possible domestic demand is dropping but worldwide demand is still rising, which will cause the price of oil to continue to rise.

John's point stands. Oil is as susceptible to the laws of supply and demand as anything else. Again I'll ask, if we're crying about $130 oil, shouldn't less developed countries be lashing out even more? How are they able to afford to increase demand?

|5.29.08 @ 10:37AM|#

There will be no decrease in driving. The American way of life is non-negotiable. Americans need to drive big SUVs and they can only be fueled by oil. I don't think it will ever be technically possible to use any energy sources besides fossil fuels. I don't think there is any environmental harm caused by fossile fuel use, global warming is a myth because the increase in temperature in the last hundred years was < 1 degree, which means it doesn't exist. Peak oil is a myth, the amount of oil on Earth in infinite, this is based on laws of economics, if it is expensive enougth we will drill more and find more. We need to start drilling anywhere and everywhere for more cheap oil so we can all afford to drive SUVs. The CAFE standards are what ruined the US auto industry, Americans need SUVs. If we drill in ANWR we will have oil forever.

|5.29.08 @ 10:37AM|#

It is possible that the price of oil could stabilize, even with rising worldwide demand. I *doubt* that will be the case. Like John said, who's richer than us that they can afford to continually increase their fuel consumption if we can't?

Even in that incredibly unlikely scenerio, our economy will still improve over not decreasing oil demand due to a reduction in overall money spent on oil.

|5.29.08 @ 10:47AM|#

It seems that in the long term, worldwide demand for oil in particular, and energy in general, is going to continue to increase. Large new sources of oil seem unlikely. Therefore, given that the supply of oil seems (almost) maxed out, alternative means of energy production will have to be implemented. At what point that these alternate means become competitive will be the question.

I live in the windy desert. The only reason this place isn't populated by wind turbines and solar panels is that they haven't become cost effective given our history of cheap oil. I've always wondered why you can't use solar power to pipe in ocean water to create hydrogen, but I am not an engineer.

|5.29.08 @ 10:52AM|#

Comparing the current situation to the 1970's is pretty much useless. The 70's "oil shortage" was greatly exacerbated -- and ultimately relieved by eliminating -- price controls in the U.S.

Geotpf|5.29.08 @ 10:54AM|#

Oil demand is extremely price inelastic, so, it takes only a slight increase in demand (or decrease in supply) to cause the price to go up a lot. Will it keep going up the next few months? Dunno. Is some or all of the recent, short term, price spike merely due to speculation? Maybe. Might the price of oil fall back a bit? Quite possibly; it's not perfectly inelastic. Will the price of oil keep going up, long term? Definitely.

|5.29.08 @ 10:54AM|#

"A source at Opec said its 13 members were uncomfortable with the current price of crude, which last week hit a record $135 a barrel.

Based on present supply and demand, he said it should be fetching $60-$70 a barrel."


http://news.sky.com/skynews/article/0,,91211-1317363,00.html

OPEC is not stupid. They are worried that the price is too high because they know what happened in the 1970s; prices got too high and the demand dropped and there was a bust. Right now OPEC wants to bring the price down before people make long term changes in their behavior and demand really falls.

|5.29.08 @ 10:55AM|#

Therefore, given that the supply of oil seems (almost) maxed out, alternative means of energy production will have to be implemented.

Can't we just drill in ANWR? It seems to me that we would have an infinite supply of oil there.

|5.29.08 @ 10:55AM|#

It seems that in the long term, worldwide demand for oil in particular, and energy in general, is going to continue to increase.

As has been repeated 10 times on this thread, demand is not going to increase without regards to price.

Rhywun|5.29.08 @ 11:01AM|#

Make gas $8 a gallon and few people will own anything but the most efficient cars or take long driving vacations.

It doesn't seem to have that effect in Europe. Last I looked it was still full of cars. The demand in America is even more inelastic since most people have no other options to get around.

Geotpf|5.29.08 @ 11:01AM|#

Troy | May 29, 2008, 10:47am | #

It seems that in the long term, worldwide demand for oil in particular, and energy in general, is going to continue to increase. Large new sources of oil seem unlikely. Therefore, given that the supply of oil seems (almost) maxed out, alternative means of energy production will have to be implemented. At what point that these alternate means become competitive will be the question.

I live in the windy desert. The only reason this place isn't populated by wind turbines and solar panels is that they haven't become cost effective given our history of cheap oil. I've always wondered why you can't use solar power to pipe in ocean water to create hydrogen, but I am not an engineer.

You are confusing demand for oil with demand for electricity. The two are only tangerially related, especially in the United States. There are zero oil powered power plants in the continental US. The US gets it's power from (in order of amount produced, more or less) coal, natural gas, nuclear, hydroelectric, and then various renewable sources (geothermal, solar, wind, biomass).

Now, it is true that solar and wind are more expensive than coal and natural gas, and that's why there aren't more solar or wind power plants. But the cost of oil is not a direct factor in that equation.

Guy Montag|5.29.08 @ 11:03AM|#

A lot of Asian countries have various direct subsidies. But how long can they afford to do them?

For the Socialistic ones, as long as they keep a large portion of their population enslaved and working below market rates. Maybe longer.

|5.29.08 @ 11:03AM|#

As has been repeated 10 times on this thread, demand is not going to increase without regards to price.

I was thinking about buying a nice 100,000 barrel plot out in the country somewhere, but with good highway access.

Tym|5.29.08 @ 11:05AM|#

There are zero oil powered power plants in the continental US.

There are a few, but very few at that < 1%.

|5.29.08 @ 11:06AM|#

The reason for the high price is gouging, there has to be gouging going on. The oil companies are making ill gotten gains. A windfall tax on oil will reduce the price of oil.

|5.29.08 @ 11:11AM|#

It doesn't seem to have that effect in Europe. Last I looked it was still full of cars.

So what? You'd need per capita mileage figures. That's the relevant comparison. Not simply car ownership. (I'm trying to find them now.)

|5.29.08 @ 11:13AM|#

"A windfall tax on oil will reduce the price of oil."
Janet,
That's a good one! LMAO!

|5.29.08 @ 11:16AM|#

Rhywun,

This article from three years ago (but just as relevant today) talks about European adaptations to high gas prices (in particular, note the difference in MPG).

So I was wrong, it's not just raw mileage, but efficiency that's also a driving force (duh).

Geotpf|5.29.08 @ 11:24AM|#

Tym | May 29, 2008, 11:05am | #

There are zero oil powered power plants in the continental US.

There are a few, but very few at that < 1%.

After further research, you are correct, although almost all of them can also use natural gas, which has been cheaper than oil for many years, so they never actually run on oil. I only found one plant location that seems to be only oil-based, and that was a group of four small peaker (not full-time) plants in Maryland.

My point is still valid; the price of oil does not affect the price of electricity directly.

Guy Montag|5.29.08 @ 11:24AM|#

The reason for the high price is gouging, there has to be gouging going on. The oil companies are making ill gotten gains. A windfall tax on oil will reduce the price of oil.

Winner! LOL

Tym|5.29.08 @ 11:25AM|#

My point is still valid; the price of oil does not affect the price of electricity directly.

True

Guy Montag|5.29.08 @ 11:26AM|#

My point is still valid; the price of oil does not affect the price of electricity directly.

Yes and it is amazing that so many people have been getting this confused for so many years.

Just about the only connection to oil is shipping costs for the coal.

Rhywun|5.29.08 @ 11:26AM|#

European adaptations to high gas prices

Oh sure, I don't disagree that they've adapted. I'm just saying that the effect isn't as dramatic as you would think based on the prices they're paying. And yet their situation is not really replicable in America without a massive investment in the transit infrastructure that we've ignored/destroyed over the last 50 years.

|5.29.08 @ 11:26AM|#

If we were to tar and feather all of those top-hat wearing oil executives, all would again be right with the world. I feel it.

|5.29.08 @ 11:29AM|#

Pro,

The same politicians who are today calling for a windfall profits tax and for the heads of the greedy oil exectutive will be screaming equally loud for tax payer money to save the oil industry once the bust hits.

Guy Montag|5.29.08 @ 11:30AM|#

If we were to tar and feather all of those top-hat wearing oil executives, all would again be right with the world.

Just don't lump all of us hat wearin' types together, like these Evil Corp Hunts tend to do.

Guy Montag|5.29.08 @ 11:31AM|#

The same politicians who are today calling for a windfall profits tax and for the heads of the greedy oil exectutive will be screaming equally loud for tax payer money to save the oil industry once the bust hits.

Wasn't one of the Leftist Congresscritters calling for the Socialization/Nationalization of the energy companies just the other day?

|5.29.08 @ 11:33AM|#

I'm just saying that the effect isn't as dramatic as you would think based on the prices they're paying.

How is an 80% difference in fuel efficiency not dramatic?

Guy Montag|5.29.08 @ 11:42AM|#

What is dramatic is the efficiency improvements of the energy firms that sell and distribute fuel in the USA.

As someone else (sorry, forgot who) has pointed out several times, since the price of crude has gone from $10/bbl to $130/bbl, the price of refined gasoline has only increased by 4x.

This all is just a sideshow of course. The real deal is if you don't like the price of something, don't buy it. Getting the government to steal it for you is just as bad as stealing it yourself.

|5.29.08 @ 11:48AM|#

I've always wondered why democratic leaders weren't cheering right about now. We're always getting funding for "smart growth" whatevers and hearing about wanting people to bike more and use public transit, and reduce polution and massive roads, etc. And now that we finally have something that could achieve all those things, we hear about the greedy oil companies and speculators and how they are taking advantage of the common person!
Seriously, WTF?
They want people to change their behavior because they want to, so long as it isn't because it's driven by market forces.

|5.29.08 @ 11:49AM|#

They want people to change their behavior because they want to, so long as it isn't because it's driven by market forces.

let me rephrase that

They want people to change their behavior either voluntarily (through virtue) or by force (direct mandates, not price-related). It must anger them that the market is achieving something that they could not.

Rhywun|5.29.08 @ 12:02PM|#

How is an 80% difference in fuel efficiency not dramatic?

I was thinking more along the lines of behavior - but you're right, fuel efficiency certainly allows their behavior to be more similar to ours than it otherwise would be.

|5.29.08 @ 12:04PM|#

I've still got my unofficial bet with John that oil won't drop below $80/bbl between this Feb and next Feb.

Guy Montag|5.29.08 @ 12:09PM|#

It must anger them that the market is achieving something that they could not.

The anger seems to be that shareholders are profiting, rather than government.

K.T.|5.29.08 @ 12:10PM|#

how come the article makes no reference to the state of the dollar?

Guy Montag|5.29.08 @ 12:12PM|#

K.T.,

Fiat money is a dirty term around here.

|5.29.08 @ 12:13PM|#

They want people to change their behavior either voluntarily (through virtue) or by force (direct mandates, not price-related).

My "favorite" moronic whiner about the gas *crisis* is the guy who complains about how much money it costs him to fill up the pickup truck which he drives any time he needs to travel more than ten feet. He wants the government to get the price of gas back where it belongs, and bring back the 55mph speed limit, so people will conserve their government-mandated cheap gas.

You can't make this shit up.

|5.29.08 @ 12:16PM|#

Yes Lost,

I have not backed out of that bet, although it is unofficial since that kind of thing is illegal.

|5.29.08 @ 12:16PM|#

which he drives any time he needs to travel more than ten feet.

I had to walk ten feet once. Once.

Kolohe|5.29.08 @ 12:16PM|#

Pump prices have risen in China, and if American motorists are cutting back on travel, you can bet that Chinese drivers are doing the same.

But the negative effect of an oil price spike on demand will be ameliorated if Chinese wages are also increasing dramatically due to first-time industrialization and efficiency gains. I have no idea if this is true, but I have read that their is broad based double-digit inflation in China due to rising wages and keeping the currency artificially low.

|5.29.08 @ 12:18PM|#

P Brooks,

My favorite are the people who want to lean on the Saudis for not producing enough while also thinking that it is A OK for the the government to ban drilling off of Santa Barbara or in ANWR. This is usually the same kind of person who wonders why the world hates the US.

Guy Montag|5.29.08 @ 12:21PM|#

Ack! This thread is taking the ugly turn of reminding me of my ex-realestate guy!

He wants a windfall profits tax "just like Nixon got" and wants to "take the profits from the drug companies", but he says he hates Mrs. Clinton and claims to be a hard-core Republican of some Conservative ilk.

AAAGGGGHHHHH!!!!

Michael Ejercito|5.29.08 @ 12:22PM|#

You also have to take into account the fact that the dollar is worth a lot less now than it was a little while ago.

If that is true, then wages would be going up.

Michael Ejercito|5.29.08 @ 12:26PM|#

They want people to change their behavior either voluntarily (through virtue) or by force (direct mandates, not price-related). It must anger them that the market is achieving something that they could not.

Some people are just anti-market fundamentalists.

Michael Ejercito|5.29.08 @ 12:31PM|#

The same politicians who are today calling for a windfall profits tax and for the heads of the greedy oil exectutive will be screaming equally loud for tax payer money to save the oil industry once the bust hits.

They did that with the mortgage industry and the housing industry. And before the wave of foreclosures, they were complaining about how housing was increasingly unaffordable.

|5.29.08 @ 12:32PM|#

If that is true, then wages would be going up.

que?

Michael Ejercito|5.29.08 @ 12:36PM|#

This article from three years ago (but just as relevant today) talks about European adaptations to high gas prices (in particular, note the difference in MPG).

So I was wrong, it's not just raw mileage, but efficiency that's also a driving force (duh).

Europe also has extensive mass transit systems.

Some people claim that gas prices in America can not be compared to Europe, because Europeans have better mass transit. But what provided incentives for people in Europe to set up mass transit?

Michael Ejercito|5.29.08 @ 12:39PM|#

Cheaper dollars mean that there are more dollars competing for labor, so the price of labor would rise with inflation.

anon|5.29.08 @ 12:40PM|#

The difference between China and US is that everyone in the US who will drive is already driving, so a decrease in avg miles will lower demand. In China you have the current stock of drivers then the huge increase in people buying cars for the first line and entering the driving market. So avg miles can go down but overall demand go up. Between the large energy demands of China and India and the increased cost of exploration and extraction, I can't imagine Oil getting below $80 again. But what do I know?

Hat Pines|5.29.08 @ 12:45PM|#

Peak Oil is upon us.

There is no denying it.

|5.29.08 @ 12:47PM|#

In China you have the current stock of drivers then the huge increase in people buying cars for the first line and entering the driving market.

Apparently, this can't be repeated enough. The Chinese (Indians, Vietnamese, whoever) will not keep buying cars if they can't afford to put gas in them. Demand won't increase without regards to price.

Stop repeating this mantra of the developing world's ever increasing demand. They may want to increase demand, but there's a price point at which they simply can't afford to.

|5.29.08 @ 12:52PM|#

"Full retreat" seems to be a bit strong as a description of our gasoline consumption.

If I called a 0.3% increase in federal spending from one year to the next a cut, you people would lynch me.

|5.29.08 @ 12:54PM|#

The Chinese (Indians, Vietnamese, whoever) will not keep buying cars if they can't afford to put gas in them.

Which is why the people who proclaim their great concern for the alleged development-restricting effects of fighting global warming on developing nations should be supportive of efforts to restrict our own consumption, and to develop renewable alternative energy sources that would allow that pent-up demand to be met in case oil gets so expenseive.

But almost to a man, they are not. Funny, that.

Michael Ejercito|5.29.08 @ 12:59PM|#

Which is why the people who proclaim their great concern for the alleged development-restricting effects of fighting global warming on developing nations should be supportive of efforts to restrict our own consumption, and to develop renewable alternative energy sources that would allow that pent-up demand to be met in case oil gets so expenseive.

We support efforts to develop renewable alternative energy sources by supporting a system which provides incentives to do so.

That system is called the free market.

|5.29.08 @ 1:00PM|#

Which is why the people who proclaim their great concern for the alleged development-restricting effects of fighting global warming on developing nations should be supportive of efforts to restrict our own consumption, and to develop renewable alternative energy sources that would allow that pent-up demand to be met in case oil gets so expenseive.

It doesn't make any sense to make ourselves poorer to make someone else richer. Why should we subsidize cheaper energy for other nations?

We should neither forcefully restrict their growth by forcing a particular style of energy usage, nor do the same to us. I don't see the conflict.

Let their economies grow naturally. When their economies hit the same barrier as ours, then may the most efficiently run win.

TallDave|5.29.08 @ 1:02PM|#

We're also seeing huge amounts of money going into alternatives like cellulosic ethanol and coal > methanol, which are quite competitive at current prices.

I'd be surprised if gas prices went much higher, though production lags due to build-out time. Of course, that also means we could end up overbuilding and eventually be back to $2 gas.

There may also be long-term benefits to high oil prices: Zubrin noted that fusion research funding is strongly correlated to oil prices, and with some new approaches out there we might be only 10-15 years from a commercially viable fusion reactor.

TallDave|5.29.08 @ 1:03PM|#

BTW, anyone know where the biggest cellulosic ethanol plant operating today is located?

Hint: they're hosting the Olympics.

TallDave|5.29.08 @ 1:06PM|#

That system is called the free market.

Yeah, its practically criminal that we're not letting developing nations like Brazil sell us their much cheaper ethanol at market costs.

I mean, with all due respect to our corn farmers, that policy puts huge amounts of our money in the pockets of Saudi Arabia, Iran, and Venezuela.

Guy Montag|5.29.08 @ 1:19PM|#

Wow, now I have been asking for quite some time who we are supposed to be "conserving" oil for and why we are supposed to be saving it. I would answer with "third world? China? North Korea? Cuba?"

Finally, it is confirmed by H&R's proud representitive of the Left wing of the Democrat party.

|5.29.08 @ 1:48PM|#

In the short term the market simply can't sustain current prices. There will be a sharp correction in the next two to four months, perhaps even sooner.

There are simply too many older wells being uncapped and put back into production, the beginnings of significant reductions in petroleum-based fuel usage here and elsewhere, and long term changes in vehicle preferences.

Long term, unless we begin exploiting the enormous shale oil, tar sands (Canada), and other resources such as off-shore drilling and ANWR, the pressure on oil prices will be forever upward. Shale oil and tar sands can yield liquid petroleum profitably at less than half the current world market price.

Unfortunately, since Congress is beholden to the environmental loonies and global warming crackpots (so is the idiot John McCain), look for the those resources to remain off limits until the Chinese or Russians simply come take them away from us.

Tym|5.29.08 @ 2:07PM|#

Wow, now I have been asking for quite some time who we are supposed to be "conserving" oil for and why we are supposed to be saving it.

It seems conservation only delays the inevitable.

|5.29.08 @ 2:16PM|#

A lot of if's and but's, and 0'yes: possible's. Did this guy forecast oil to $130.00 6 months ago? Doubt it. I did.

So, why does he have a voice? Based on what?
Crude will bottom the week of June 23rd.

Since 1986, everytime Crude or Gasoline has been 2.00 or greater from the mean using the Cash weekly price the market has moved back to the upside. Sorry to destroy your emotional reasoning,but I have to inject some solid mathematical and logical understanding.

Get someone with some brains to write for your magazine; not a harlequinn ghost writer

Sincerely, Fred Starkey

|5.29.08 @ 2:57PM|#

So Fred, with such an unbeatable market formula, you must be filthy, stinkin', billgatesian rich. Why you hanging around here with the hoi polloi? And how many more billions you plan to rake in with your short between now and June 23rd?

|5.29.08 @ 3:05PM|#

Oh, you're just pumping your investment newsletter. I dig your style, man.

Gilbert Martin|5.29.08 @ 3:48PM|#

We've got plenty of oil we could use - it's been put off limits by the politicians who're catering to the eco-socialist wackos.

There's lots of oil in ANWAR, there's lot of oil under the outer continental shelf (85% of it is off limits to exploration and development), oil shale deposits in the western U.S. contain an estimated 3 times the total oil reserves of Saudi Arabia. Sythetic gasoline can be made from coal and we have a several hundred year supply of that.

What we have is a deliberatly engineered stratagy of forcing high oil prices by blocking development as s means of forcing us all to change our lives as "penance" for our "sins" against nature as determined by the environmental wackos.

Gilbert Martin|5.29.08 @ 3:52PM|#

"The same politicians who are today calling for a windfall profits tax and for the heads of the greedy oil exectutive will be screaming equally loud for tax payer money to save the oil industry once the bust hits."

The same politicans now who are pretending to be so "concerned" about high gas prices and conducting show trials of oil company executives are the same ones blocking the development of our own oil reserves AND the same ones yapping about a carbon tax - which would most certainly drive the price of gas up significantly higher.

e|5.29.08 @ 4:10PM|#

From the article:

People are abandoning SUVs for hybrids, taking mass transit and even venturing out on foot.

Wait, mass transit is reducing demand for gas? That's screwing with the market. I say, eliminate mass transit; it's a government subsidy that is keeping the gas prices artificially low. Who's with me? Let's get the real libertarians out in front on this crucial issue.

Gilbert Martin|5.29.08 @ 4:55PM|#

" I say, eliminate mass transit; it's a government subsidy that is keeping the gas prices artificially low."

On the contrary, it's making gas prices artificially higher since a lot of the gas tax money paid by drivers is siphoned off to pay for mass transit. If that were stopped, the gas tax rate could be permanently lowered.

|5.29.08 @ 5:43PM|#

We should expect a little more than an opinion piece. How about the facts behind supply and demand.

Demand:
The U.S. could possibly decrease demand less than one percent a year in the short term.
Increases in China and India of an average of 5% even with usage of one third and one eighth that of the U.S. respectively are greater than the possible U.S. decrease. This is ignoring the evident increases in domestic consumption in the Middle East and Latin America.
Increases in consumption these Asia and Latin America will continue regardless of price increases. Why? Their increases are due to hundreds of thousands of new cars on the road every month as economies in these countries develop. Their purchases are of small and efficient vehicles that will still contribute to their productivity and quality of life even with increasing gas prices.

Supply:
Let's ask the EIA how much each additional percentage point of domestic oil production will cost. U.S. oil companies are buying crude on the world market at $135 a barrel for a reason. If it were cheaper to develop and extract from new sources, this is what the U.S. and every other purchaser of crude oil would be doing. The only fields now being discovered are smaller, deeper, contain less, and will cost far more to extract from than what the industry has been accustomed to. Are the new sources of U.S. oil we're counting on gaining new supplies from in the Gulf of Mexico? Try beneath 5 miles of water and earth with the field qualities listed above. The new finds in Brazil? This is probably the deepest drilling for oil that has ever been attempted. They will be developing the full understanding of how they extract it as they go along. It is clear this will be difficult and very expensive.
Then there are the countries that have hit decline rates for their oil production since the seventies. Some put the current count at over fifty countries.
There will be no easy creation of new supply this time around.

e|5.29.08 @ 5:53PM|#

On the contrary, it's making gas prices artificially higher since a lot of the gas tax money paid by drivers is siphoned off to pay for mass transit. If that were stopped, the gas tax rate could be permanently lowered.

Gilbert, any numbers for how much gas taxes go to mass transit? Or is it just "a lot"? Also, what is the proportion of taxes that go to mass transit versus road maintenance/construction? (or again, is it just "too high"?)

e|5.29.08 @ 5:56PM|#

Looks like the enviro-socialist wackos still have a long way to go, Gilbert:



"Typically, mass transit systems rely on fares to cover about a third of their costs, so they depend on sales taxes and other government funding. Few states use gas tax revenue for mass transit."

Paul|5.29.08 @ 7:11PM|#

I'm going to stick my neck out and claim that this article, while having some merits, is an oversimplified analisys. Well, ok, let me say that it doesn't take certain things into account. For instance:

Pump prices have risen in China, and if American motorists are cutting back on travel, you can bet that Chinese drivers are doing the same.

No, Chinese drivers are not doing the same. A Chinese driver is doing the same, but not driver(s).

Let me provide my own (over) simple analisys:

In 1985, China had 100,000,000 drivers, because few could afford a car. With the expansion of the Chinese economy, China now has 600,000,000 drivers. Ultimately, even Chinese drivers, on an individual basis, have cut their fuel consumption down by even 5 or 10%, the amount of overall fuel consumption is China is way...WAY up. Ditto for India.

I can't speak to how much the fuel price is related to all factors, and how much. Factors such as false or politically motivated supply issues (OPEC et. al), or market speculation. But we know one thing: As the third world becomes the second and first world, worldwide fuel consumption will go up, and supply must increase. Fuel efficiency must also increase along side. Period.

Steve Verdon|5.29.08 @ 7:19PM|#

This isn't a nightmare scenario, but it also isn't necessarily a rosy future, either. If all Chapman has to offer in his article is just blind hope ("Don't be surprised if it happens again,") well, that's not really much to hang your hat on. I mean, I hope he's right, but can't bank on it. I'm still looking to buy a house in the city, high taxes be damned.

Actually jkp, what Chapman is describing is a typical boom/bust cycle that has shown itself to be the norm not the exception. You are arguing the exception, and hence I'd argue the burden is on you.

Note also that Chapman noted that oil might be cheap...relative to what? Why current prices, which means $60/barrel would be cheap.

Two words:

PEAK OIL

Peak oil does not mean that we can't see boom/bust cycles.

It'll suck, expect a recession, but the industrial world will, as it always does, muddle through. Teenagers in the US will still cruise on Friday nights.

I think that is probably about right.

People who are much smarter and better educated in economics than me told me with a straight face that housing would never be a bad investment and that housing prices would go up forever.

Depends on your planning horizon, doesn't it?

DS|5.29.08 @ 7:23PM|#

The price of ALL commodities have been going up at a steady pace for 6-8 years with a few corrections along the way. The Dollar has been in a steady decliine during the same period. Commodities by their very definition are not differentiable which means they are sold on price alone. Therefore commodities respond directly to the value of ALL currencies used to buy them.

ALL currencies have been increasing in supply for many years, some at slightlty higher or lower rates, but all of them have been increasing. This explains why the Euro, for instance, has been gaining value versus the Dollar - they are printing their fiat money at a slightly slower rate than the US.

Voila! Worldwide inflation which is rearing it's ugly head in virtually every country of the world. This is plain for all to see.

Any attempt at explaining the price of oil, or any commodity, without talking about the supply of ALL global fiat currencies is pointless.

Unless you think ALL commodities have increased dramatically for their own independent and peculiar reasons.

Sorry, was I not supposed to mention fiat currency?

|5.29.08 @ 8:06PM|#

Unless you think ALL commodities have increased dramatically for their own independent and peculiar reasons.

If the values of all commodities increase dramatically relative to the value of human labor or capital, that is enough to explain their rising prices.

Wages are sticky-down. If the price of some input goes up relative to labor, you are not apt to see the wage go down in order to keep the supply of money constant. Usually the prices of inputs that increase faster than the price of labor are counteracted by the prices of other inputs that decrease relative to the price of labor and the simple growth in labor productivity. But sometimes the commodity price increases can overwhelm wages.

So you have either an upset workforce or mild inflation.

Would we all be better off if money were pegged to a basket of commodities so the currency of wages was not so sensitive to price increases in them? Yes. Is a mild inflation consistent with the price increase of many goods relative to wages such as that happening today irrational, destructive, or a great lie perpetrated on the people of the world? No.

Jennifer|5.29.08 @ 9:36PM|#

Saudi Aramco's oil production fell by about 4 percent in 2007.

Personally, I think world oil supplies are either at peak or slightly past it. Just how bad things get during the decline will depend on multiple factors, not just how steep the decline itself is, but (more importantly) how everyone responds to it.

I have complete faith that however this unfolds, the government will manage to screw things up even worse. And that when this happens, folks here will say government is not merely making a bad situation worse, but is solely responsible for the problem because the only factors affecting the amount of available oil are: how much money you're willing to spend for it and how many regulations prevent your doing so, not how much oil actually exists and is extractable.

Personally, I wish they'd drill the hell out of ANWR and offshore and everywhere else. It won't make much difference, but at least people will stop being able to blame oil-supply problems on that.

Gilbert Martin|5.29.08 @ 10:11PM|#

"Gilbert, any numbers for how much gas taxes go to mass transit? Or is it just "a lot"? Also, what is the proportion of taxes that go to mass transit versus road maintenance/construction? (or again, is it just "too high"?)"

Any percentage greater than zero is too much since the gas tax is supposed to be a pure user fee.

But as per the following data, about 15% of the federal gas tax is going to mass transit.

http://www.artba.org/economics_research/reports/gas_tax_history.htm


Oh and I forgot to mention that the taxpayers are also getting ripped off on the costs of road construction projects (and every other type of construction project as well) and have been for about 70 years because of the Davis-Bacon Act. That legislation is nothing more than a bullshit political giveaway of the taxpayers money to labor unions.

Paul|5.29.08 @ 10:12PM|#

The problem is, Jennifer, that some of the worlds biggest fields are in countries that are tight-lipped about the state of those fields.

Plus, as peak oil fears (be they real or perceived) rise, those countries are more likely to use that production domestically as opposed to selling it off to other nations.

I for one welcome our new-fangled technologies in steam engines. We have an endless supply of wood and forests. I just have to get someone to keep feeding logs into the boiler while I'm driving around town.

Gilbert Martin|5.29.08 @ 11:04PM|#

"Personally, I wish they'd drill the hell out of ANWR and offshore and everywhere else. It won't make much difference, but at least people will stop being able to blame oil-supply problems on that."

Won't make much difference?

How do you know?

The oil share in the western U.S. alone is estimated to contain 3 times the total oil reserves of Saudi Arabia.

Using that won't make much difference?

Synthetic gasoline can be made out of coal. We have an enormous supply of that. Doing that wouldn't make much difference?

I think it would make lots of difference.

e|5.30.08 @ 3:20AM|#

15% is "a lot"? Ok...

DS|5.30.08 @ 7:29AM|#

"If the values of all commodities increase dramatically relative to the value of human labor or capital, that is enough to explain their rising prices."

That doesn't "explain" anything, it's simply an observation on the state of things currently. You've explained nothing.

The fact is that in a stable money environment when one price rises another must go down. If wages cannot go down (because they are "sticky"), then other prices cannot go up.

In an environment with worldwide fiat money creation all prices can go up uniformly, but they never do. If all prices went up uniformly, at the same time then "mild" or even extreme inflation would only be a problem for the people who had to re-price items at the grocery store or constantly re-write contracts. But that's not how it works - with excess fiat money creation consumers feel wealthier than they actually are, sending inaccurate demand signals to producers that then make capital investments that reflect these false signals, and usually neglect other product categories that are less profitable in this temporary environment. When the market eventually corrects itself the malinvestments are liquidated and the neglected industries are weakened.

For instance, in the 70's the high commodity prices caused by over-investments in oil exploration capacity, agricultural and mining sectors. After most of the inflation was wrung out of the system by Volker these busineesses went into a serious bust for more than a decade. It's no coincidence that the crisis of competitiveness of American business occurred in the 1980's when most industries outside of the inflationary boom suffered from a decade of under-investment.

The same thing happened during the Tech-Boom in the 1990's - the manufacturing base and other staple businesses were starved for investment because everybody was putting their money in worthless internet companies - money that has now evaporated. The result of all of the mal-investments - a hollowing out of the real productive capacity of the nation in favor of the temporary "boom" sectors that evaporate after the market corrects. This is a net loss. This all happened when inflation was supposedly "mild".

"Is a mild inflation consistent with the price increase of many goods relative to wages such as that happening today irrational, destructive, or a great lie perpetrated on the people of the world? No."

Where on the planet is experiencing "mild" inflation?

Inflation, mild or otherwise creates huge distortions in the price system and capital allocation. The Greenspan era of "mild" inflation saw the dollar lose half it's value - and that's if you believe the inflation statistics put out by the government. If you use the method of calculating inflation in 1980 or 1990 in reality it was much worse than that. The loss of value does not happen evenly either.

|5.30.08 @ 9:30AM|#

Guy Montag,

It's the Democratic Party. Thanks.

Jennifer|5.30.08 @ 10:51AM|#

[Drilling in ANWR, etc.] won't make much difference? How do you know?

Even the most optimistic estimates I've seen of how much oil is there adds up to enough to cover current US needs for a few years. And that's assuming we get every single drop out of it, which we won't. ANWR won't maintain the status quo; at most it'll delay the end a little. (In an ideal world it could fuel the transition from the oil economy to whatever post-oil economy we'll have, but that won't happen because most people still say there's no need for it.)

The oil share in the western U.S. alone is estimated to contain 3 times the total oil reserves of Saudi Arabia.

I suppose you meant "oil shale?" Yes, yes, I've heard all about that too. The other night I was looking through old PO arguments in these archives (ah, for the halcyon days of 2005, when people who suggested $100-a-barrel oil in a couple years were derided for being too pessimistic, rather than for underestimating how high and how fast prices would rise), and read about how oil shale will be great, its just that it isn't profitable unless oil gets to some "outrageous" per-barrel price like $80 or $90.

Well, we're considerably past that already. But the main point of peak oil is NOT that oil will vanish, but that it'll be far too expensive to use as we use it now. Our economy is hugely oil-dependent, and the switch from a cheap-oil economy to an expensive-oil economy is going to hurt, especially considering the large number of people digging in their heels and insisting there's no need to switch.

The arguments for why we won't see $100 a barrel oil anytime soon are, I'm sure, the same to explain why we won't see $150, or $200, or whatever. I've heard them all before, and the prices keep rising all the same.

But when it does get to $200, we'll still hear how oil shale will save us; it just isn't profitable until $250 or whatever. Even if true, so what? I'm not worried about the oil companies' ability to remain solvent. Certainly, they'll find ways to keep making money. It's the ordinary American people who will have problems when they can't afford their daily commutes, or spend so much money on them that there won't be anything left over for discretionary spending, which hurts the discretionary-spending parts of the economy, and on and on.

But neither of us will succeed in convincing the other. If you're convinced there's no intrinsic problem with actual oil supplies, there are plenty of scapegoats you can blame instead. Blame OPEC for refusing to ramp up production. Or blame the environmentalists. Or blame the government for its stupid regulations. I too criticize all three; I just think they're making a bad situation worse. Y'all seem to think they're the sole source of the problem-which-isn't-a-problem.

I look forward to the annual "oil will drop back to $50 a barrel next year" predictions this December. Or maybe by then the standards for optimism will have shifted enough for the prediction to actually read "drop back to $100." Whatever.

Michael Ejercito|5.30.08 @ 11:37AM|#

Our economy is hugely oil-dependent, and the switch from a cheap-oil economy to an expensive-oil economy is going to hurt, especially considering the large number of people digging in their heels and insisting there's no need to switch.

The people who have the foresight to switch will make money, and those who lack the foresight will lose money. Is that too hard to understand?

Jennifer|5.30.08 @ 11:47AM|#

Yes, Michael, the only issue to consider here is whether or not people feel like doing something; physical factors like how much oil is actually available are non-issues. I know, I know, I've heard it all for years. This is only an economic issue, not a natural-resource-availability issue.

Oil shale will save us as soon as it gets profitable, and that point will always be a mere 30 or 40 dollars per barrel more than whatever the current price is.

|5.30.08 @ 12:57PM|#

I think something changed in the Matrix. This is the first time I have ever agreed with Chapman.

Jennifer|5.30.08 @ 1:05PM|#

Today's Wall Street Journal reports that despite rising prices, Oil exporters are unable to keep up with demand:

The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic and looks set to continue.

Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well.

Steve Verdon|5.30.08 @ 1:23PM|#

But wait Jennifer, I thought you said it was all about running out of oil, not increasing demand. Please, work on getting your narrative straight.

The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic and looks set to continue.

Actually not that hard to understand when you realize that adding additional capacity is not as easy as text books make it seem. Getting away from all the peak oil stuff, adding additional generation capacity for electricity can take years? Why? Both because of the type of market we are talking about and the insitutional issues such as siting and licensing which require government approval.

As for the increasing demand with high prices, again not hard to understand when you factor in that some countries subsidize their oil consumption. In such cases consumers are not seeing the real market price and are not getting the signal to cut back. Increasing demand in such a situation could very well be "rational"--in and economics textbook sense--behavior on the part of consumers.

I see nothing all that shocking or unusual here.

Jennifer|5.30.08 @ 3:40PM|#

But wait Jennifer, I thought you said it was all about running out of oil, not increasing demand.

Peak oil has nothing to do with "running out of oil." It's the point at which oil "peaks." In other words, that's the maximum amount produced, before entering into a decline. And no matter how much demand there is -- i.e., how much money people are willing to pay for it -- production can't keep up with it.

But no matter. As I've already said, we won't convince each other. Production is already falling even as prices rise, but you can blame OPEC, subsidies, the environmentalists, the government, or the Illuminati.

So when the world next year produces less oil than it did this year, you'll have more reasons why this has nothing to do with world oil supply. And a new excuse for the drop the year after that. And the next drop, and the next drop.

But honestly: I never DID understand why so many libertarians think it's a form of free-market heresy to consider the possibility "oil supplies aren't sufficient to maintain the status quo, so perhaps we need to consider a change." The idea that "standards of living will decline if an important resource becomes significantly more expensive with no corresponding increase in productivity" does NOT equate "let's all become Communists."

And I don't know why you all insist on pretending it does.

|5.31.08 @ 6:09PM|#

I agree with Jennifer. Peak oil is real and often misunderstood. There are other major factors at play such as the collapse of the dollar that are greasing the wheels but drilling in ANWAR is more of a philosophic debate than something that will actually solve this problem in the short or long term.

As for the price of oil, it's going up in the medium and long term and there is little doubt about that. This is nothing like the housing bubble, in fact the same people that were calling out the bubble in housing 5 years ago for what it was are some of the loudest cheerleaders for this boom in commodities. The writer in the link below can probably articulate it better than I can. Prices for oil retreating back to $80, $90, or even $100 at this point is fantasy.

http://stefanmikarlsson.blogspot.com/2008/05/why-there-wont-be-any-oil-price.html

|6.2.08 @ 11:54AM|#

The SCUM BAGS in Washington all share stocks in Oil. You think BushCo is going to stop price price gouging? What a joke. These guys are making mega $$ and telling us that there's an oil shortage. I'm calling BS. They can't have it both ways.