[Pops]

I talked about this some in the Peak Economy thread, Jean Laherrère & Sebrowski posted on it, but when I made this plot it was still a surprise:



Here it is using a non-bootleg chart:



First, this is the Brent price, the reason being, pretty well everywhere in the world except Oklahoma (the mid-continent US) gets their oil via ship and right now Brent is the best price marker for floating oil.

According to the model in my brain, the economy is not able to pay above $100 for new, 'non-conventional' oil fields. This isn't written down anywhere, the number might be $120 or $80 but it seems pretty certain it's in the ballpark that correlates to 5%-10% of US GDP. On the first chart the red band around $100 is where the economy chokes, the orange, eyeballed trendline of "base" oil price seems to be entering that range now. On the second chart I placed an Excel trendline and whichever flavor I tried resulted in almost exactly the same result - right at $100 today.

So unless you hear some huge popping sound that indicates the Energy Fairy has pulled a miracle out of her ear, or conversely that austerity has finally had the inevitable effect of collapsing the economy completely, I think it is pretty clear we are entering into the realm of perpetual economic stagnation: unable to continue economic growth due to high energy price and in turn, unable to afford the increasingly higher cost of the marginal barrel.

Whether this is a result; a signal; or irrelevant to imminent geological decline I don't know and in fact it doesn't really matter. Right now oil mining in Canada needs an $80/bbl long term price forecast to get a green light for new projects. I mentioned in the Cheap Oil Tipping Point thread that if all the "new" oil being touted from every business page and web site will only be brought on line with a long-term selling price forecast greater than $80/bbl, we may be in a world of hurt if the economy can't pay.

Not only does each new marginal barrel have that $80-$100 price tag, every barrel of old fashioned $40 conventional oil we burn must be replaced with a new $80 barrel too. So not only would the economy not be able to grow, the oil supply it wouldn't be able to compensate for depletion of the remaining cheap oil. So the net effect is "economic peak oil".

What everyone got wrong before was thinking the price of oil would continue to climb without regard to demand. Presumably because we are so addicted we just couldn't or wouldn't stop buying it until we all fell over dead trying to pay $1,000/bbl. What actually happened was demand turned out to be elastic after all, high prices basically shut down the economies that couldn't pay. The resulting "elastic" reaction to $147 crude was a dive to $60/bbl after which the economy snapped back, after a fashion. At any rate, what is happening this time around with the slight disruption of Libya is milder rise and a quicker pull-back (probably because of the WTI glut) but what isn't happening is the big drop in price like in 2009 that gave the economy a little boost, or at least time to recoup.

So it seems to me we are entering The Zone, the end of the wedge, the place where expensive oil, oil-like substances and not-oil-at-all has come to the rescue temporarily but replacing depletion seems difficult going forward, let alone growing supply. The key term of course is expensive. All the business blogs are talking about the huge amounts of oil "recently discovered" and the "new" enabling technologies - of course what they neglect to point out is many of the resources themselves have been known about for decades and the primary new enabling technology is $100 oil.





http://www.odac-info.org/newsletter/2011/09/16
http://hulaco.net/index.php?option=com_ ... latestnews

[Duende]

Great breakdown of the current fix we find ourselves in, Pops. I particularly find compelling the explanation provided about the elasticity of demand: I honestly didn't see it coming. But when the price got up to $147, the economy snapped down violently. Since the 'recovery' began, we're noticing must less pronounced oscillations in the price, which is slowly creeping up. Will these oscillations continue to get smaller as we enter the sharp end of the wedge? I'm not sure.

Economic problems are so interconnected nowadays in today's global economy that only long term projections are somewhat accurate. In other words, we can all pretty much agree on where and why we're heading where we're going. The big questions are when, how, and who will the chips fall upon?

[smiley]

On the first chart the red band around $100 is where the economy chokes, the orange, eyeballed trendline of "base" oil price seems to be entering that range now.

Just some back of the envelope calculations (you know I like numbers).

- The US uses about 18mb a day. (Actually it will be a bit more due to the import of oil based products, but just take this number.)
- With about 127 households that boils down to 50 barrels a year per houshold or $5000 at $100/b.
- Median household income is about $ 45.000 of which oil represents 11% at $100/b

If you assume that any rise in oil prices is eventually transferred to the consumer either by taxation, product pricing or otherwise, this suggests that a $10 dollar increase in oil price leads to a ~1% loss of total income.

Of course you can drive a truck through the many of holes in the assumptions in this calculation, but I believe the order of magnitude is about right.

Then Pop's assumption that a rise of oil prices from $60 to $110 would lead to an economic slowdown seems not at all that far fetched since this would represent a sizeable load on the average consumer.

[Pops]

Bakken is providing some needed relief for the US;

This is where you re confused. The US produces no oil, multinational corporations do and they certainly don't cut us a break. The price of gasoline in the US no longer tracks landlocked WTI, it's tracking Brent which is the world vessel-borne price:



The upshot is the US consumer see no benefit to the glut in Oklahoma, the few refiners that can access that crude merely buy it at the WTI price and sell the finished at the world price whether in Cincinnati or Calcutta and pocket the difference.

We certainly are benefiting jobs wise from increased drilling there's no doubt. And considering how many holes are being made it would be a real drag if they weren't getting something!

[The Practician]

Same goes for Canadian Tar sands. The Alberta Gov't only collects a 1% royalty on tar sands operations, which is a full 24% less than they take on conventional production. on top of that, the energy extraction industry in Canada has the highest profit per employee in the country. (the lowest? Manufacturing. duh.) Canadians not involved in the industry get diddly sqat out of the deal, unless they happen to be in the cocaine or over-sized truck buisness.

[Pops]

Same topic at TOD, Countdown to $100 Oil

A day of reckoning and acceptance of harsh reality looms. The OECD will most likely continue to lose share of global oil consumption to developing economies who manage to deliver more energy service per unit of energy consumed enabling them to pay a higher price and secure that ever higher share. Should that lower share of static supply turn into lower share of decreasing supply then severe economic hardship will follow with employment levels, social and health services and pensions hit first and hard - it is already happening!

[Pops]

we are looking at more like a sustained $150/bl to start forcing contraction.

Cool. Thanks.
I really have no reason to say $100/bbl other than mere observation and lots of articles here, and here and here. In fact one study said the absolute amount of the increase isn't as important as the rate of the increase.


BTW, your link to wiki was talking about fractional reserve banking which doesn't explain anything about how one $100k oil job creates 200 other $100k/yr jobs for the $10 million cost to the consumer. Maybe one or two $20k/yr jobs but 200 jobs @$100k? Why not 500? 5,000?

[sparky]

.
Good thread Pops ,

some comment , the U.S. $ valuation should account for a coming rip roaring inflation
in effect a depreciation of the currency .

the number of jobs created is immaterial , what matter is the export jobs created

more people on the public payroll might sound good but it only work if they don't consume oversea stuff
the external trade has to balance for the increase in cost of energy import and all those oil based plastic goodies

So far it's the Canadian who are shafted , they pay 30$ a barrel for having a one customer market
it should be noted the enthusiasm for stoping the pipeline to the gulf ,
as usual greenies are the tools of corporations , it would break a beautiful racket
.

[Pops]

For some ridiculous reason this thread was merged into the extraction technology mega thread - but I've liberated it!

[Pops]

I wanted to post my newest plot - I mean chart..



and compare it to the one I doodled back in 2011 (the OP)



I was guessing the ceiling price at $100 and that doesn't look too far off.

[sparky]

.
Another index is telling the same story
the OPEC basket price , applicable to the biggest export of crude , is stuck in the $100 to $105 band
http://www.opec.org/opec_web/en/data_graphs/40.htm

that seems to be the range constraining demand and supply
Europe demand is weakening while Asia is growing
but overall that's the undulating plateau

[Pops]

Thought I'd post the WTI chart showing the price going through the "cost floor" - you all remember what happened last time. Wonder what will happen this?

[basil_hayden]

Last time I could feel the world around me take a deep breath, preparing for a plunge.

This time, it feels like a cork is about to pop with overflowing condensates for a heck of a rowdy party for a couple more years.

Perhaps it's me being more prepared, or that even minor economic activity seems major these days, not sure.

[Quinny]

What's going to happen with all the shale plays now? Those in production and what about new exploration?

How much did the big oilco's sink into new wells last year and what was the cost?

My head is in a spin!

[ROCKMAN]

Pops - "...economic peak oil." The "EPO"? Careful there, cowboy, that sounds a lot like the POD (Peak Oil Dynamic): the rather inclusive interplay between price, production rates, consumption, economic vitality, geopolitical forces,

It would appear that the date of global PO isn't going to determine the price of oil on that day or on any other date. The POD...err...I mean the EPO...will determine what oil sells for on any particular date. LOL.

[Pops]

Pops - "...economic peak oil." The "EPO"? Careful there, cowboy, that sounds a lot like the POD (Peak Oil Dynamic): the rather inclusive interplay between price, production rates, consumption, economic vitality, geopolitical forces,

It would appear that the date of global PO isn't going to determine the price of oil on that day or on any other date. The POD...err...I mean the EPO...will determine what oil sells for on any particular date. LOL.

Just a way to pass the time until actual physical geological - lack of new places to drill - PO decline sets in

[ROCKMAN]

Pops - "...lack of new places to drill." So true. And you may not have that long to wait. There were very few places to drill horizontal shale wells when oil was $40/bbl. With the current slide in oil prices we'll see how many of those proposed drill sites (at $100/bbl) suddenly disappear from the geologists' maps. I'm just unbelievably lucky to have just picked up a conventional oil drilling program that works even at $40/bbl. As has been said: sometimes you're better off being more lucky then smart. LOL.

[shallow sand]

It looks to me that the independent horizontal shale drillers don't have much cash and debt has ballooned. If US oil production growth slows soon, will oil price rocket back up over 100 to the other side of the "wedge"?

[Pops]

From my OP in 2011

So it seems to me we are entering The Zone, the end of the wedge, the place where expensive oil, oil-like substances and not-oil-at-all has come to the rescue temporarily but replacing depletion seems difficult going forward, let alone growing supply. The key term of course is expensive. All the business blogs are talking about the huge amounts of oil "recently discovered" and the "new" enabling technologies - of course what they neglect to point out is many of the resources themselves have been known about for decades and the primary new enabling technology is $100 oil.

Demand was high enough to support $100 oil and at $100 we overproduced. The price was bound to break out one way or another, it couldn't go higher than consumers could pay so it had to go lower.

So what comes next?

US demand was up at christmas. No surprise there, Demand = Desire x Ability; high price reduces "ability to pay", low price increases "ability". So for the same amount of "desire" low price increases consumption. A safe bet would be low prices will continue to increase consumption. In the US & CA, production is still climbing essentially on the backlog of completions and the need to pay the sharks that enabled the surge to begin with. Everyone that knows me in the real world smirks, 'Lookit those prices, LOL"

But if a well is not forecast to make a profit it won't be drilled. And as ShallowSand said, therin lies the rub.

The thing Wedge 2011 didn't contemplate was an oil glut combined with continuing economic growth and high demand. It is a failing of my PO bias combined with my underappreciation of the potential of tight oil to (i) cause a glut "overnight" (in oil development time-scale) (ii) kill the glut "overnight" on low price.

With China Debt at 250% of GDP it's growth has probably peaked, That 14% growth rate had a lot to do with $100/oil demand. But now years of high prices have stalled economies everywhere and now Global Central Bank Quantitative Easing (CBQE) is underway. If US QE is any indication CBQE spells "bubble".

Will that bubble feed an out of control volatility cycle that eventually leads to the Big One? That was my basic idea in the 2020 oil price challenge thread although I thought price would be tied more to demand than production but who to tell the difference when the outcome is as predicted?




Here it is the Wedge updated to January:



.

[Pops]

If there is any doubt that "Peak Demand" was a red herring and that the value of oil to the economy is limited by price rather than EROI, this is it:

(Reuters) - Fuel demand in Texas is growing strongly as lower oil prices encourage motorists to use their vehicles more and buy larger replacements.
Receipts of motor fuel taxes in February 2015 were 6 percent higher than in the same month in 2014, according to the Texas Comptroller of Public Accounts.
...
Texas tax statistics are the fastest leading indicator of fuel sales. But nationwide data in recent months has painted a similar picture of rapidly growing gasoline and diesel sales across the country as the economy strengthens and cheaper prices encourage more driving.

http://www.reuters.com/article/2015/03/ ... 2V20150316