[DantesPeak]

Thoughts? Insights?

Oil is climbing fast for three reasons:

1. Demand has already exceeded supply, on a total barrels basis.

2. On a quality basis, we are already declining in net usable oil.

3. Oil products demanded no longer matches up nicely with oil products supplied per barrel, for example diesel demand has created extra incremental demand for oil (I know this is partly redundant of the first two).

Adding those three reasons to the approach, and passing of PO, has lead to a surge in price.

It's possible new geographical dispersion and refinery utilization issues we don't see today could develop as additional reasons.

Since net exports to oil importers are accelerating down, prices would then be accelerating upward. The three factors above may have temporarily overshot the normal aceleration curve, but those factors may not go away.

So yes, we are on a very steep, possibly geometric uptrend on a year over year basis.

[fletch_961]

Since about 2000, the price of oil has been rising on a roughly exponential curve, about doubling every two years: ~$10/bbl in 2000, $20 in '02, $40 in '04, ~$80 in '06, and we are now well on our way toward $160 in '08.

Oil wasn't at $10/bbl in 2000. That was late 1998. It was already trading around $30 in 2000. Except for the decline due to the 2001 recession + 9/11 it was mainly flat until the middle of 2004 ($30/bbl). It then double to ~$60/bbl mid 2006 and has doubled again mid 2008.

The fact that it has double every two years for the last 4 years does not mean it is growing exponentially. By coincidents you can approximately fit it to an exponential curve. I'm sure you could look look at a chart of pretty much an stock and find a period where the price change matched an exponential curve.

So what should we expect prices to do as we arive at the downward slope?

Supply and demand. Price goes ups when supply drops.

But maybe when the much ballyhoo'ed "demand destruction" sets in, that will moderate price?

It is already moderating price. Do you mean cause prices to drop?

Or will geological limits and "positive" feedbacks (hording, speculation, wars...) swamp the "negative" feedback loop of demand destruction?

If you are asking will prices continue to go up rapidly (exponentially?) forever then the aswer is no. Eventually, there has to be an upper limit. Even billionaires will think twice before hoping in jet if it costs millions to fill-up. Where that limit will be who knows, but demand destructions and alternatives will eventually put oil out of reach. Just ask Pstarr, he gots some wacky calcualtion where he can make biofuel from algae in his bathtub when oil reach $1200/bbl. Actually I think he was planning on using the swimming pool at the Hyatt.

[arretium]

That chart goes to 2006 when oil was half what it is now. That puts oil now at ~6.5% of today's GDP. It is a lie to state that we are in new territory as his chart shows.

[........]

Somebody to ignorant to realize that GDP changes over time ...

And..

Anybody who can't multiply two numbers together loses a lot of credibility if you ask me. Ten of trillions of dollars?
~30B bpy * $130 = $4.2 trillion.

I noticed that too. You're the first to point it out. The math didn't work for me either, but I didn't post about it. Good call pointing it out.

This guy was a geology professor at Princeton for 30yrs? How embarrassing...for Princeton. I think he should stick to scratching rocks together to determine their hardness on the Mohs scale and leave chart drawing and thinking for people with the capacity to do so.

Very critical of him. So you think that someone who is **NOT** writing about his area of expertise shouldn't have credibility? Is that right? You're saying a geology professor has no business taking about economics, right? Is that the gest of your perspective?

If so, then I assume you'd also be critical of engineers talking about literature or, ahm, economics professors talking about geology? Would that be fair? And if it is, then I assume you take this same level of criticalality to people such as, oh, Michael Lynch, Daniel Yergin, and the rest of the econ cornucopians?

[dohboi]

Thanks for the thoughts, all.

Fletch, aren't you assuming markets and currencies will continue to operate normally? Is this likely for very long in a post peak world well into the down slope, ie. the near future?

If oil gets extremely precious, isn't it likely the military will require that its use be restricted to war functions? If buying and selling of a rare quantity is prohibited, what happens to its price? It seems that what ever a black market price is, that doesn't really reflect the real price a buyer may pay, since he may pay jail time or even with his life. Can you really quantify that "price" adequately?

The price doesn't have to "go up forever," it just might not make sense after a while to talk about it's price in terms of dollars (for a variety of reasons, perhaps.)

[fletch_961]

So you think that someone who is **NOT** writing about his area of expertise shouldn't have credibility?

Nope didn't say that. But when someone points out that they have been a professor at Princeton for 30 years they should try not to embarrass their Alma mater by making 4th grade math errors. They shouldn't try to plot 3 independent variables on a 2 dimensional graph. He lost all credibility on anything to do with mathematics there. Perhaps I was more critical then I could have been, but if someone misrepresents data when common sense should have caught the error I think less of them. Pardon my crassness.

You're saying a geology professor has no business taking about economics, right? Is that the gest of your perspective?

I wasn't even critical of his economic conclusion of $300/bbl oil other then to state that I doubt it meant "smouldering ruins" and the fact that he wasn't sharp enough to recognize that GDP changes over time. If he can't demonstrate that level of cursory knowledge then he should stick to non-economic endeavors.
That was the gist of my argument. His presentation of the data was utter nonsense. In fact I am more concerned about his knowledge of geology. He sites econ 101 to state that supply goes up when prices do. If his geology background was strong enough, he would realize that it take time to discover and develop new fields. He would also have a general idea at what price points these activities would start to occur considering the difficulty of reaching the remaining oil. Having a few data points over the last couple of years showing volume has not increased would not lead him to conclude that we have reached peak oil. It doesn't prove anything. It would be only be one possibility. My opinion is that we will see a small increase in production before we hit peak, but I'm not a geology professor or an econ prof.

If so, then I assume you'd also be critical of engineers talking about literature or, ahm, economics professors talking about geology? Would that be fair?

Certainly it would be fair. If an engineer wants to have layman conversation about Hamlet with me I see no problem. But if he holds himself out to be an expert in Shakespearean literature and says "there is something rotten in the state of Scotland" I will certainly be willing to call foul.

And if it is, then I assume you take this same level of criticalality to people such as, oh, Michael Lynch, Daniel Yergin, and the rest of the econ cornucopians?

Certainly, if I catch something that goes against my knowledge of geology. Unfortunately, I dropped geology since scatching rocks together to determine their mineral content was not my thing.

If Lynch or Yergin start babbling about infinite supply, I will recognize everything that comes out of their mouths as BS. If they want to talk about abiotic oil, I will ignore it and get my information from a geologist. If they want to discuss ramping-up oil production, they had best demonstatrate they have at least cursory knowledge of geologic constants. I have not followed the Lynch thread as it really doesn't interest me.

[cube]

...
I do agree that the "crashing economy" bit is unnecessarily sensational. He could have pointed out that the economy will only crash in certain segments. The energy economy and all widely related activities will boom along nicely, taking an ever greater share of global economic activity for long into the future.

It's my observation that many things in life do not happen "linearly".

For example if you watch a tug of war competition you'll notice in the beginning both sides seem evenly matched. The flag tied to the middle of the rope goes left and right as if it's contained within 2 imaginary borderlines. However once the flag moves to far to one side there is a violent movement. It's as if the weaker team suddenly decides to give up ALL at once. Why doesn't a tug of war happen linearly? --> answer: that's just natural human behavior. Humans like to think in terms of boundary lines. Once the line is breached there is a violent movement.

Look at the relationship between oil and the airlines. Notice that oil went from $10 to $100 with almost zero incident? However once the magic $100 number was breached the airline companies started falling over like dominoes. What is the magic psychological number that will cause a total breakdown? I think $300 oil.

[threadbear]

Denny,
I think you're right, and that is a taste of things to come, with more of the double digit inflation that the US had in the late 1970's. I presume that Canada had a similiar experience.

You're not going to get significant wage inflation to counter price inflation. It would release the one anchor that keeps us from hyperinflating. As long as union activity is weak, wage increases will be modest. People will have to carpool, hitchhike, ride mopeds etc...That is starting now. If and when it hits 200.00 per barrel, the destruction to the economy will be so vast, it won't be rising more.

[fletch_961]

Fletch, aren't you assuming markets and currencies will continue to operate normally?

I'm not sure what your definition of normal is. When I said oil wouldn't go up forever I meant in real terms not nominal.

Is this likely for very long in a post peak world well into the down slope, ie. the near future?

Could very well be that things will go relatively "normal". Or I might have to exchange 100 goats to buy a gallon of gas from the local warlord. Your guess is as good as mine, but I'm guessing that Wal-mart and the greenback will be with us for a long time.

[dohboi]

"I might have to exchange 100 goats to buy a gallon"

Nice image! My new nomination for quote of the week.

By normal, I mean something resembling a free market, whether in bucks or goats.

When gas starts being ever more heavily rationed, then finally prohibited, this will not be anything anyone would recognize as a free market, wouldn't you say? There will surely be a black market, but the risks involved in dealing in this market could easily eventually include death. How do you tally that "price."

I would love to hear about any, even one, mainstream economist that you respect that predicted anything like the oil prices we are seeing happening at this time.

[patience]

Threadbear,
Excellent point on inflation. We're just gonna get poorer. A lot poorer.

[MD]

Nope didn't say that. But when someone points out that they have been a professor at Princeton for 30 years they should try not to embarrass their Alma mater by making 4th grade math errors. They shouldn't try to plot 3 independent variables on a 2 dimensional graph. He lost all credibility on anything to do with mathematics there. Perhaps I was more critical then I could have been, but if someone misrepresents data when common sense should have caught the error I think less of them. Pardon my crassness.

I had no difficulty interpreting the image or keeping it in context so that leaves me searching for the source of your angst. Care to talk about it?

Oh, and ranting on about credentials...weren't you able to get past that through junior high debate club? {sorry...I couldn't resist}

[fletch_961]

I had no difficulty interpreting the image or keeping it in context ...

Are your sure?

Each point represents the price and production level at a given time. Each points position can then be compared to the curved lines to show what percentage of total economic activity is related to oil sales at that given point in time.

Uhm..no.

It doesn't look like anyone was able to interpret the graph-correctly.

I don't understand the graph.

The 3 curves represent a specific percentage of global GDP. The cost of oil is then measured against GDP.

this is a graphic representation of consequence of declining energy return.

[TheDude]

Deffeyes most likely acheived his figure using the PPP value for World total GDP - 65 trillion, 6% of which is 3.9 trillion. 85 million (bpd)*130*365=4,033,250,000,000.
Rough figures but none of these values are static except the days in a year and I don't have the math skills to pursue this further. Deffeyes is far sharper than you give him credit for. Have you read his books?

Are your sure?

MD's sure is positive. You're a bit slack in the grammatical syntax department, if you want to pick nits.

[fletch_961]

MD's sure is positive. You're a bit slack in the grammatical syntax department, if you want to pick nits.

Yeah, I figured I would get called on that sooner or later on this thread. I should have proofread.

Deffeyes most likely achieved his figure using the PPP value for World total GDP - 65 trillion, 6% of which is 3.9 trillion. 85 million (bpd)*130*365=4,033,250,000,000.

As I stated earlier, there is not a problem w/ the figure he arrives at for today's GDP and his 6.5% of GDP goes to crude oil. It is inaccurate when it shows 1970's and 1980's data displayed as being 1% or less of GDP when in reality 7.5% of GDP was going to crude oil at that time (early 80's).

Link

[MD]

Uhm..no.

It doesn't look like anyone was able to interpret the graph-correctly.

In the spirit of your rebuttal..."umm...yeah".

Of course I'm willing to take the graph as is. You on the other hand seem hell-bent to shred it.

[yesplease]

People seem to love pointing out when the MSM screws up and misses a day when reporting on demand destruction, yet I don't see much love for point out the screw ups here... Perhaps the reports of the site turning into a death cult weren't exaggerated? It'll be the end of the world if we speak poorly of our our Malthusian cheerleaders!

[TheDude]

As I stated earlier, there is not a problem w/ the figure he arrives at for today's GDP and his 6.5% of GDP goes to crude oil. It is inaccurate when it shows 1970's and 1980's data displayed as being 1% or less of GDP when in reality 7.5% of GDP was going to crude oil at that time (early 80's).

Link

That's US GDP, he's using World DP. Does it make a difference? This is what he says in his article:

For the 2007 world economic output, almost identical numbers come from the International Monetary Fund and the CIA.

The scales on the graph are simple linear scales. Prices have not been adjusted for inflation. (I claim that correcting oil prices for inflation is circular; inflation is often driven by energy prices.) The prices and production are as-is, without being converted to a year-on-year basis.

Don't have time to build tables like the ones Ken is using, but here are three charts:







We'll just eyeball - really scientific, I know! But I can't dig up historic figures for world GDP. The left side of his graph approximates 18 BBO/year = 1970. Nominal oil price was, say $3/bbl, World DP of 5 trillion, perhaps. Thus 1.08% of WDP being used for oil. The spikes in the nominal price would represent 1973/79. In the latter case oil hit $40/bbl, that would be the number I'd investigate to see if Deffeyes is up to anything fishy.

I might write him and ask if he could pin down some of these figures. Since it's a simple enough formulation I really doubt he's cooking books like you're implying.

[fletch_961]

That's US GDP, he's using World DP. Does it make a difference?

Not really since US GDP is ~25% of the World's GDP and US oil consumption is ~25% of the World's oil consumption. The two numbers are divided by themselves so you get the same amount either way.

But I can't dig up historic figures for world GDP. The left side of his graph approximates 18 BBO/year = 1970. Nominal oil price was, say $3/bbl, World DP of 5 trillion, perhaps. Thus 1.08% of WDP being used for oil. The spikes in the nominal price would represent 1973/79. In the latter case oil hit $40/bbl, that would be the number I'd investigate to see if Deffeyes is up to anything fishy.

Oil was at 1% of in 1970. Did you look at the link I posted? Now look at where Deffeyes plotted ~$3 oil. Right around a tenth of a percent.
Oil in the early '80s hit 7.5% of GDP. That is not reflected in Deffeyes graph. His graph shows it at less than 2%.

[yesplease]

In all fairness, oil costs as a percentage of world GDP in 1980 were only ~4-5%, but, at the same time, oil consumption was not as common in many parts of the world. Mistakes are mistakes... He's still missing a dot near 5% around 22bbpy and we ain't spending tens of trillions on oil (at least not w/o including externalities) until it goes to ~$350-400/bbl w/ consumption and the dollar staying where they are now.

Edit- Also depends on whether the PPP or Currency or Etc measure of GDP is used.

[Serial_Worrier]

Abandon all hope!