Peak Oil is You
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Page added on June 4, 2012
Oil Prices are Down, and That’s Very Bad News
Stuart Staniford reviews the recent rise and then collapse of oil prices today, and concludes that it’s the economy, stupid:
So whither these trends now? On the one hand, it seems clear that the recent downward forces on prices will continue….Spain’s difficulties rescuing Bankia, and the fact that there are likely still a lot of not-fully-discounted bad loans in Spain’s banks, suggest that the Spanish government is near the end of its rope….And then there is the continued inability of the polarized US political system to come to grips with major challenges — particularly the upcoming expiry of the Bush tax cuts and the automatic spending cuts that will be triggered around the end of this year. All this is chilling stock markets everywhere, particularly as no-one really knows what the implications for the global financial system will be if pieces start to fall off the Eurozone as it trundles forward.
These kinds of considerations suggest that the downward break in oil prices could continue quite a lot further.
But if that happens, Saudi Arabia will probably cut production and prices will rise again. So oil prices may fall in the short term, but will probably stay around $100 in the medium term.
Generally speaking, we’re finally living in the world of peak oil. Or call it plateaued oil if you like, since we seem to have hit a rough plateau in oil production that’s likely to continue for quite a while. This is the world of the vicious circle: when the economy gets better, demand for oil goes up and oil prices spike. This causes the economy to tank, which sends demand for oil down. Rinse and repeat. Add to that the effect of external events on oil prices (the Arab Spring, pipeline breakdowns, embargoes on Iran, etc. etc.) and world economic growth is likely to remain both sluggish and unstable for the foreseeable future, held hostage to OPEC oil production until we get serious about alternative energy. And since, in this brave new world, the price of oil gyrates frequently and erratically, it’s hard to get people serious about this. If oil were, say, permanently above $200 per barrel or so, we’d be building wind farms and installing PV solar at breakneck speed. But whenever the price of Brent falls below $90 or so, everyone gets nervous and wonders if wind farms and solar arrays are really such a good investment after all.
The uncomfortable truth is that we’d probably all be better off if the federal government simply taxed oil variably at a rate that set the all-in price at $200 no matter what the market price was. That would be high enough to get everyone serious about more reliable energy sources and stable enough that investors would be falling all over themselves to fund alternative energy projects. And since it’s oil price spikes that hurt the economy more than high oil prices per se, this probably wouldn’t even have a major impact on growth.
It’ll never happen. But something like it probably should. There’s enormous upside both economically and environmentally, and the revenue would help address the federal deficit problem everyone pretends to be worried about. Conversely, the downsides are pretty modest and manageable. Wouldn’t it be nice if any of this actually made a difference in Washington DC?
8 Comments on "Oil Prices are Down, and That’s Very Bad News"
BillT on Mon, 4th Jun 2012 3:27 pm
$200 oil would decimate the world economy. It definitely would cut use…for everything. It would also make the Arab Spring look like the beginning of the Black Plague. Better to just tax gas & diesel at $10 per gallon and get it over quick. But that would be political suicide and will never happen. We prefer to die a slow painful death by inflation/deflation.
shortonoil on Mon, 4th Jun 2012 4:00 pm
Our model* (which has a 51 year historical correlation coefficient of 0.96 of actual to projected oil prices) projects a 2012 per barrel price of $71.86 (WTI). Prices have been quite high for 5 of the last 7 years, with only 2009 and 2011 falling reasonably close to the curve at $56.35/b and $71.21/b respectively. This magnitude of price elevation has historically been the result of some type of attempted price manipulation. The most pronounced episode of this occurred during the 6 years of 1980 through 1985 when OPEC attempted to elevate price by cutting their production by almost 50%. Prices surged from an average of $9.01/b to $26.34 (an increase of 292%) before OPEC discovered that you can’t beat the Laws of Thermodynamics. Once OPEC resumed normal production, prices rapidly fell back to the curve, and settled at $12.51/b in 1986.
Although there are several possible culprits in this scenario (King Abdul a and Uncle Sam not withstanding, not to forget JPM and GS) there is another possibility. Over the the last 50 years (for which we have data) oil prices have been a function of oil’s Etp (P = f(Etp)), or total production energy; the total energy required to extract, process, and distribute the oil. Post peak, in an attempt to maintain revenue the oil industry kept production elevated by channeling energy that would have gone to the end consumer back into production; inadvertently further reducing the flow of energy to the end consumer. In the event that this happened the model projected that prices would increase beyond the statistical boundaries of the curve, the economy would slow, and crude surpluses would appear (all of which we are seeing, and quit differently from what Keynesian economics predicts).
Regardless of intended or inadvertent actions, prices will fall back to the curve. No one cheats the Second Law; and from there they will resume their relentless climb upward.
The Hill’s Group
*”A depletion model of world crude oil reserves”
Plantagenet on Mon, 4th Jun 2012 5:51 pm
The article’s claim that we will remain on a production plateau is based on what? Fairy dust?
Global oil production is going to start declining.
bobinget on Mon, 4th Jun 2012 6:48 pm
Not knowing exactly where to start, how about
population growth? China’s ‘planned’ economy not unlike ‘demand’ models, require ‘growth’. The more people at the base of a pyrimid the more we need to use up resources to make stuff so we can use it up and throw it away.
Example:
Oil intensive plastic packaging. Virtually everyone knows plastic packaging is waste waiting to happen. Never-the-less, we persist. Plastic bags use could well measure ups and downs in our economy. Most government economists seeing a surge in PB use would cheer “business is improving” …. Is this a good or evil? Short term, like employment in the defense industry it’s good.. Provides jobs, uses raw materials.. blah blah.
Longer term, nothing constructive comes from weapons or throw-away packaging. Sure enough though, we have used raw materials, shipped the stuff using diesel or gas, paid and taxed workers.
After years of thinking and watching the oil industry
it has become apparent, declining oil production will not be the chief issue. Given enough price incentive I’m sure we will be able to wrest hydrocarbons from the earth till a substitute energy makes the old model uneconomic. WE see a little of that today with the vast difference in price per BTU between crude and natural gas and coal. No, increased desires of quickly multiplying populations is more to the point.
Venezuela’s Orinoco and Alberta’s oil sands, as yet undeveloped, could by themselves, power the planet for a decade. (it won’t be cheap).
Instead of ‘dust’ I wish on a star for ‘Contraceptive Fairy”
MrEnergyCzar on Mon, 4th Jun 2012 11:13 pm
They’ll have to start shutting in the Tar Sands….
MrEnergyCzar
BillT on Tue, 5th Jun 2012 12:58 am
Ah, but they are not considering that ot that the drilling in the Arctic or any other highly expensive place will cease. Ditto the oil shale ideas, etc.
It will not be long before we are back at $100+, but a few oil companies will be out of business and a lot of ‘investors’ broke. But that’s capitalism.
Kenz300 on Tue, 5th Jun 2012 12:14 pm
Oil supply is building and the price is declining in advance of the sanctions on Iran. When the oil supply from Iran is shut off the supply will decline and the price will rise. Sanctions rise in July if no solution to the Nuclear impass is found.
BillT on Tue, 5th Jun 2012 12:38 pm
Kenz, China and India and Japan are going to continue to buy Iranian oil. The oil exchange is already in place. No worries about Iran not selling their oil. That’s about like the drug cartel not being allowed to sell drugs in the US. Ooops! Not only do they sell here in huge quantities,($70 billion per year) but the TBTF banks are washing their money for them. So much for the Empire’s waning power.