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Page added on June 19, 2015

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Predictions Of Oil’s Demise Premature

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The recent meeting of the Organization of Petroleum Exporting Countries provides an opportunity to understand the mysteries of the global oil market. As expected, OPEC decided not to cut its oil production. Barring unanticipated developments, prices will drop, says oil analyst Larry Goldstein. Potential oil supply, including drawdowns from bloated inventories, exceeds demand. Goldstein rightly cautions, however, that no one knows where prices will settle.

Oil’s dramatic price changes seem baffling. In mid-2014, crude prices averaged around $100 a barrel; now, they’re gyrating between $50 and $60. Over the same period, U.S. gasoline prices have dipped from more than $3.50 a gallon to around $2.50. With the world economy slowly recovering, why have prices collapsed?

The standard explanation comes in two parts.

First, oil demand is what economists call price inelastic. Slight changes in supply and demand can produce large price swings. People and businesses need fuel. If oil is scarce, they still need fuel and will pay dearly to get it. If oil is plentiful, they don’t need much more fuel and, therefore, require huge price discounts before buying more.

This is what’s happened. Supply and demand have unexpectedly expanded the global surplus, reducing prices. The increase in American shale oil (U.S. oil production is up about 80 percent since 2006) unexpectedly boosted supply. Weaker than predicted global economic growth depressed demand. The world now uses about 93 million barrels daily, or mbd, but can produce 95 mbd or a bit more.

Second, Saudi Arabia hasn’t absorbed the surplus. OPEC isn’t a cartel, says Goldstein, because most of its 12 members won’t cut production to prop up prices. In the past, the Saudis have done that. But now they are refusing to play. They’ve flooded the market with oil. Reportedly, they don’t want to lose sales to other producers. They are also said to worry that excessively high prices will blunt the future demand for oil.

All this is fine as far as it goes. It explains the mechanics of lower prices. But it misses a larger story: the retreat from “peak oil.”

Peak oil would occur when new oil discoveries no longer offset annual consumption and provide for future growth. This seems unavoidable. Oil is a finite natural resource. There’s only so much of it. When it’s gone, it’s gone. The trouble is that this compelling logic has yet to play out in the real world.

In 1950, global oil production was about 10 mbd. By 1970, it was nearly five times that, 48 mbd. Now, production and consumption are marching toward 100 mbd. Whenever peak oil seems to threaten, some combination of high prices, technological advances and happenstance expands global supplies.

The upshot is public confusion, as oil analyst Blake Clayton shows in a fascinating new book “Market Madness: A century of oil panics, crises, and crashes.” We repeatedly veer from the psychology and reality of scarcity to the psychology and reality of abundance.

The pattern dates to at least the 1920s, Clayton writes, when the explosion of car ownership inspired much talk of “oil exhaustion” and “gasoline famine.” Little wonder. From 1921 to 1929, the number of gasoline stations mushroomed from 12,000 to 143,000. In 1919, the average car traveled 4,500 miles a year; a decade later, the distance had nearly doubled. But gasoline scarcity was prevented by new discoveries in Texas and Oklahoma, advances in drilling (deep wells went from 6,000 to 10,000 feet) and improved oil refining.

After World War II, the fear was that the United States, having supplied both its own and its allies’ oil needs, might soon drain its reserves. Never happened. Whenever prices are high, the notion that scarcity is permanent thrives. In 2008, 76 percent of Americans believed “the world is running out of oil.” Similarly, the fear of peak oil was one reason for thinking crude prices, until their recent collapse, would remain stuck in the $100 to $150 range.

The common error, Clayton writes, is that “no one at the time can see where more oil would come from.” There is a silent assumption that “if it has not been found yet, or cannot be extracted with today’s technology or at today’s prices” that it won’t ever exist. History has repeatedly refuted this premise.

All this suggests a deeper significance to the recent price collapse. Oil is not inexorably fading from the world stage. Peak oil remains distant. This, of course, has huge implications. To the extent that oil is a source of geopolitical and economic instability, the dangers remain. To the extent that it feeds global warming, the dangers remain. Unless history changes — and who knows, it might — the Age of Oil endures.

hartford courant



18 Comments on "Predictions Of Oil’s Demise Premature"

  1. GregT on Fri, 19th Jun 2015 8:24 pm 

    “With the world economy slowly recovering, why have prices collapsed?”

    The world economy isn’t ‘slowly recovering’, but rather, the recovery continues to slow.

  2. shortonoil on Fri, 19th Jun 2015 8:44 pm 

    Another author who just does not understand that depletion is a real, unavoidable consequence of resource extraction. Depletion not only involves the quantity of resource remaining, it involves the per unit value of that resource. The value of a barrel of oil is going down because a barrel of oil is powering an ever lessening amount of economic activity. Demand is not there because it is not worth buying. When the value of a barrel of oil becomes less than the cost to produce it, and its products, it will no longer be produced.

    http://www.thehillsgroup.org/

  3. HARM on Fri, 19th Jun 2015 9:47 pm 

    “Peak oil would occur when new oil discoveries no longer offset annual consumption and provide for future growth. This seems unavoidable. Oil is a finite natural resource. There’s only so much of it. When it’s gone, it’s gone.”

    The author gets half of the picture right. EROEI and the Land Export Model represent the other half. How far will shale/frack oil push out the inevitable peak? Who knows. It’s already pushed it out further than anyone on this site (myself included) would have believed possible a few years ago.

    Nonetheless, fracking has not repealed the laws of thermodynamics or turned a finite resource into an infinite one, despite what all the Julian Simon fanboys here seem to believe.

  4. Ted Wilson on Fri, 19th Jun 2015 11:01 pm 

    Oil consumption continues to fall in
    Power Generation
    Heating
    Petrochemicals.

    Only in Transport sector, its increasing. This will continue for some time. But at some point in the future, this will sputter.

  5. GregT on Fri, 19th Jun 2015 11:04 pm 

    “But at some point in the future, this will sputter.”

    And when it does, all hell will break loose.

  6. Boat on Sat, 20th Jun 2015 2:34 am 

    So when does the sputter and hell breaking place happen. I keep reading 3-5 years and every year it’s the same, just wait 3-5 years.

  7. GregT on Sat, 20th Jun 2015 3:08 am 

    The ‘sputtering’ is already occurring everywhere around you Boat. Choosing to be ignorant of reality, will not make reality go away. When hell breaks loose is anybodies guess, but it is coming soon enough, as sure as rain. You still have time to make plans for yourself, but that time is rapidly running out.

  8. Boat on Sat, 20th Jun 2015 4:42 am 

    The reality is consumption of everything and populations is still growing at a fast pace. I would not call this sputtering. Peak consumption peak and peak population are real. I just think doomers like yourself have the timing all wrong and don’t appreciate how well humans adjust. I still think were decades away as a human race from climate change and the thinning of the heard so to speak. We will continue to replace drops in population from calamity and peak this or that by being frisky and continuing to have sex.

  9. Davy on Sat, 20th Jun 2015 5:15 am 

    Boat, I will drop to my knees bow several times and then kiss your feet if you can give me solid evidence of a bright future for the next 10 years. Don’t give me as Marmi says “prattle” of the corn variety. You corns can call me a word salad prattle preacher but corns have the burden of proof to uphold. I will readily convert to your cornucopian ways if you can show me solid evidence not just economic prattle and worn out dubious Marmi Fred “Freddy” fluff charts. Too much lying and shenanigans going on for me to believe all the happiness from every cornucopian source. You guys are stuck on yourselves like a diva on her beauty. You will be like a diva that loses her beauty in a tragic accident. You could end up naked and destitute and that scares the hell out of you all. Is that frisky enough for you Boater?

  10. Boat on Sat, 20th Jun 2015 6:33 am 

    Davy corns have the burden of proof to uphold,….Why is the burden of proof on me? When the success of the human condition has done nothing but improve? Do you enjoy your plumbing? Your AC, Smart phone, computer, 30+ mpg car and zero energy house. All these are standard for a human with a decent job. More of these humans who live with amenities like this exist in greater numbers than in any other time in mans history. That is my proof. PS did I mention medicine and how we live longer. No bowing or kissing of the feet required.

  11. rockman on Sat, 20th Jun 2015 6:50 am 

    And of course the Rockman will again have to bore everyone with his standard rant: the date of global PO holds very little relevance. That includes the current moment when, as a result of the dramatic decrease in oil prices, we may be at GPO. Wait for it…wait for it…THE F*CKING POD!!! LOL.

    Do I have to again go over the $TRILLIONS of the US treasury and thousands of lives lost by our military “bringing democracy” to oil producing regions? Do I have to remind about the ADDITIONAL $trillions transferred from the oil importing economies to the oil exporters? And lastly do I have to again point out that today’s “cheap oil” is selling for about 2X the inflation adjusted price? And that the current “cheap” US gasoline price is still 70% higher then it was before the “great American shale boom”?

    And then there’s the current list of armed conflicts and political confrontations happening at the moment in the primary oil exporting regions. Is this the picture of a world that need not worry about energy supplies?

    Kinda like the joke about the cancer patient getting good news/bad news. The good news: the cancer is in remission thanks to the new drugs. The bad news: the drugs are making you feel like crap and are destroying a bit of the quality of your life…and you’re still going to die from the cancer eventually.

    But that’s OK…you still haven’t reached PL yet. PL: Peak Life. Party on, dude! Of course that’s after you clean off your lost hair from your pillow and had your regular morning puke marathon.

  12. shortonoil on Sat, 20th Jun 2015 7:17 am 

    “Peak oil would occur when new oil discoveries no longer offset annual consumption and provide for future growth. This seems unavoidable. Oil is a finite natural resource. There’s only so much of it. When it’s gone, it’s gone. The trouble is that this compelling logic has yet to play out in the real world.”

    Oil is $60/ barrel. $60/barrel does not supply enough income to replace reserves that are being extracted. E&D costs per barrel have tripled in the last 15 years. The compelling logic is that Peak has already occurred, and producers are pumping existing reserves as fast as possible to compensate for lower prices, and lower total revenue. Counting barrels, and ignoring everything else that its occurring is like jumping off a cliff, and ignoring the ground. Its like Bungy Jumping without a Bungy cord. The ride down may be fun, the the conclusion isn’t.

    The petroleum industry is now in trouble; their business model is broken. To prevent the herd from spooking, and pulling their financial support they’ll employ every lame brain writer out there to keep telling the world not to worry. Many will believe them. That’s like hiring the fox to watch the chicken coop!

    http://www.thehillsgroup.org/

  13. Kenz300 on Sat, 20th Jun 2015 8:42 am 

    It is time to end the oil monopoly on transportation fuels.

    Electric vehicles are the future……….

  14. penury on Sat, 20th Jun 2015 10:17 am 

    I want to question this statement: It is time to end the oil monopoly on transportation fuels. I am personally very interested in the replacement of fossil fuels as transportation fuels. Got an alternative? Or even a timeline that would be possible? And how wold this be made available to 7.5 billion people? I will not question funding, cause the magic unicorns will provide. If your timeline for change is greater than five years, I think it comes under the realm of “not going to happen”. The transportation fuel of the future is same as it used to was: How far can you walk in a day?

  15. joe on Sat, 20th Jun 2015 10:35 am 

    Ok I stopped reading when it said demand is price inelastic, then in the very next sentence said supply and DEMAND caused massive swings in price. This came from the ministry of bulkrap.

  16. Boat on Sat, 20th Jun 2015 12:36 pm 

    shortonoil, Your opinion The compelling logic is that Peak has already occurred, and producers are pumping existing reserves as fast as possible to compensate for lower prices, and lower total revenue….

    Nigeria,lowers their oil to get at market share, Iran wants to get market share, Iraq continues to eat up more market share. And last but not least you have the frackers that are more than willing to work at what? 70-80? Then tar sands behind that.
    So how do you figure there has been a peak yet. Still oil to be had to match demand.

  17. BobInget on Sat, 20th Jun 2015 7:17 pm 

    http://www.theguardian.com/environment/2015/jun/16/obama-administration-clean-energy-investment-initiative

    With $4bn and a new government office, the White House has unveiled its latest clean energy initiative and cast a subtle new role for the federal government: not only is it a funder of new research, of the latest solar converter or biofuel source, but it is also a market builder.

    “One of the real challenges is the gap in financing clean energy,” said Ernest Moniz, US secretary of energy, at a press conference on Monday. “There is a continuing need for new capital investment.”

    The new initiative follows on a White House pledge in February to organize mission-driven renewable energy investors, concentrating their impacts and providing information to would-be investors daunted by an unfamiliar clean-energy landscape.

    At the press conference on Monday, Moniz and senior advisor Brian Deese fleshed out the details: $4bn in commitments from pension funds, family foundations and other so-called impact investors, and a newly unveiled office of technology transitions that will serve as an all-purpose informational resource for clean-energy investment.

    “We will not make investment decisions, or directly engage in them,” said Moniz, but rather provide information to help guide discussions of people not already steeped in the field. While providing information sounds nebulous, it’s arguably what renewable energy needs most now: not new breakthroughs, but something to catalyze investments that can make existing breakthroughs go mainstream.

    The initiative represents the latest stage in the Obama administration’s clean-energy policies. In some quarters, these are still synonymous with Solyndra, the California-based solar cell manufacturer that went bankrupt after receiving $535m from the US department of energy.

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    Yet that reputation is mostly unfair – and not just because the loan program responsible for the Solyndra deal is expected to turn a $5bn profit. The US now leads the world in wind energy production; the price of solar energy has plummeted, and adoption jumped.

    The administration’s policies “made a tremendous difference in driving the cost of these technologies down”, said Nathanael Greene, director of the Natural Resources Defense Council’s renewable energy policy program. The challenges now, he said, are not so much technical as logistical.

    These range from solar-panel zoning standards to helping investors understand the clean energy investment space. It can be confusing, said Greene, particularly for investors unfamiliar with both the technology and the sorts of financial arrangements used in impact investments seeking both profit and social good.

    “The program will help explain the technology, the stages of investment. It will pave the research landscape,” said Greene. “This is about helping the private sector understand and invest in clean energy.”

    The announcement also comes just more than a year after the Obama administration announced its plan to cut carbon pollution from power plants by 30%, and with Congress having recently found rare bipartisan agreement on energy efficiency.

    At the press conference, several reporters pressed Moniz for details on what the new investment landscape would look like. How would the $4bn in investments differ if made independently, rather than under the auspices of the new initiative?

    “I can’t give you an example yet,” said Moniz, “but check back in a year. I hope I’ll have a bunch.”

  18. Kenz300 on Mon, 22nd Jun 2015 7:22 am 

    We all need to start making changes…..

    Renewable Energy Responsible for First Ever Carbon Emissions Stabilization – Renewable Energy World

    http://www.renewableenergyworld.com/articles/2015/06/renewable-energy-responsible-for-first-ever-carbon-emissions-stabilization.html

    ————————-

    For Faithful, Social Justice Goals Demand Action on Environment – The New York Times

    http://www.nytimes.com/2015/06/21/science/earth/for-faithful-social-justice-goals-demand-action-on-environment.html?emc=edit_th_20150621&nl=todaysheadlines&nlid=21372621&_r=0

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