[smiley]

One of my oil companies .......And if you want high oil prices to have a net positive impact on your personal economy, you can always buy oil stocks.

When browsing through these forums you might get the impression that half of the posts are made by business execs whizzing in their private planes from one meeting to another. You know that if you want to impress people on this site with the fruits of your financial insights, that's best done via a sizeable server contribution?

and this is something you can learn more about in an introductory Microeconomics course

That is the problem, people doing the microeconomic course and thinking they understand the economy of oil. The thing you have to realize is that energy is at the basis of just about everything: when you flick on a light switch, when you fire up that bulldozer, when you make concrete, steel, glass you name it. For instance when you talk about capital cost you have to wonder how much energy goes into making these machines, shipping them to site, constructing and outfitting the buildings etc. And then you can understand why capital cost have shot up so much.

When energy prices rise just about everything gets more expensive including the production of energy. That is why the oil bonanza that has been predicted since 2001 never materialized.

Lets look at it another way, there are about 9 million Americans working in the oil industry, and about 125 million who don't. I think we can agree that those 125 million will not be happy with rising oil prices, then the benefits for those other 9 need to be pretty good in order to offset the effects for the majority.

[GoIllini]

When browsing through these forums you might get the impression that half of the posts are made by business execs whizzing in their private planes from one meeting to another. You know that if you want to impress people on this site with the fruits of your financial insights, that's best done via a sizeable server contribution?

We're not quite as rich as you think at three years in, but how do you give?

That is the problem, people doing the microeconomic course and thinking they understand the economy of oil. The thing you have to realize is that energy is at the basis of just about everything: when you flick on a light switch, when you fire up that bulldozer, when you make concrete, steel, glass you name it.

Absolutely, but everything but the bulldozer can take electricity- or at least other hydrocarbons- fairly easily. And we've got a lot of natgas in the ground.

For instance when you talk about capital cost you have to wonder how much energy goes into making these machines, shipping them to site, constructing and outfitting the buildings etc. And then you can understand why capital cost have shot up so much.

Well, the price the oil is being sold at has also gone up, so it's not the capital cost, it's the risk. Ten years ago, folks were looking for ROIs of 8%. Now they are looking for 15%. It's not the supply of capital but rather market volatility- especially in the wake of 2008/2009. Economical projects with a given EROEI five years ago are no longer economical; it's not the cost of energy but the volatility. When puts on oil start getting cheaper- and people are less worried about the price dropping- you'll see more projects come online.

Lets look at it another way, there are about 9 million Americans working in the oil industry, and about 125 million who don't. I think we can agree that those 125 million will not be happy with rising oil prices, then the benefits for those other 9 need to be pretty good in order to offset the effects for the majority.

Sure. But there's also 18 million unemployed Americans, and if we have a very labor-intensive project for getting oil out of the ground like shale, you could double the number in oil pretty darned easy. 1 million barrels of shale requires more a lot more labor than 1 million barrels of primary extraction Texas crude.

[Pops]

Exactly, and the bottom line is that in a net oil producing country, high oil prices create more jobs than they cost. Even in less of a net oil importer, you lose some jobs but gain many of them back due to higher production.

Ok so your idea is the effect of high oil prices are outweighed by a greater number of oil jobs, lets look at that.

Here's a chart showing oil jobs:



After the recession drilling has gone back up so lets say the run up in oil price has added 50k jobs since 2000. Even though 25% of all oil jobs are in Houston that's great!

In 2000, the price of oil was about $20 and this year Brent is averaging over $100. The US burns over 18 million barrels of oil a day, so the increased cost to the consumer is 18 * 365 * $80 ---- say $500,000,000,000 --- half a trillion bucks per year of less spending somewhere else because of higher oil prices.

But you're saying 50k new oil jobs outweigh that loss of consumption everywhere else. I'm sure a hand on a rig makes good money but $10,000,000.00 per year?

[GoIllini]

LOL, a jobs graph ending in 2009? I seem to remember a certain commodity losing 75% of its value during that dip. Care to overlay that with a chart of WTI? Meanwhile, the dip from $100/barrel back to $35 provided a needed boost to the economy.

[vision-master]

Meanwhile, the dip from $100/barrel back to $35 provided a needed boost to the economy.

Oil dipped from $100 barrel to $35 barrel bc the economy is in the crapper.

There wuz no BOOST.

[GoIllini]

Well, according to Pops' model- one I agree with- consumers had more money to either save or spend on things outside of gasoline, so while the economy was in a mess, consumers were getting a boost from lower gasoline prices. That boost combined with cash for clunkers bought us a decrease in oil intensity in 2010.

[Pops]

LOL, a jobs graph ending in 2009?

Jeez, do I have to hold your hand? Ignore the drop in '09.

Look back in this very thread to see that drilling still hasn't reach the volume it had in '08 and yet I completely ignored the drop in employment in '09 to give your model of "high oil is good" the benefit of a 50k jobs increase.

So hopefully with that you can explain to me how each new oil job offset the $10 million per job cost to the US consumer.

[Pops]

, according to Pops' model- one I agree with- consumers had more money to either save or spend on things outside of gasoline, so while the economy was in a mess, consumers were getting a boost from lower gasoline prices. That boost combined with cash for clunkers bought us a decrease in oil intensity in 2010.

Wait a minute, you agree with the increase in oil price providing 50k jobs at a cost of $10,000,000 each and say that was a good thing - but you also say the drop in gasoline prices in '09 was a good thing too?

Which is it? If high oil prices are good for the economy then how can lower oil prices can't be good for the economy too?

[GoIllini]

Well, that number sounds about right. Guys off in Bakken earn $100K, spent perhaps 98% of their money on rent, food, entertainment etc, back in 2008, and we've now got the sum of a geometric sequence impacting the economy resulting in a 50x modifier from their base income. So on balance, yes, we lost $10 M per job created, but North Dakota's and Texas's economies got $5M back in 2008. Now as Bakken grows larger and the US economy consumes less oil while producing more, we lose less when oil prices go up and gain more from jobs in Bakken as production continues to increase.

Which is it? If high oil prices are good for the economy then how can lower oil prices can't be good for the economy too?

I'm saying that Bakken's a good thing. Yes, we are an oil importing country. That means higher oil prices are a bad thing for us as a whole until we become a net oil exporter. But Bakken is making us LESS of a net oil importer and helping to attenuate the impact of high oil prices on our economy.

The point is that we're in much better shape on the energy front than we were in 2006 when even I with my relatively rose tinted glasses was very nervous.

[Pops]

I'm glad you agree constantly increasing oil prices are harmful to the economy (especially after 2 pages of citing all the reasons they aren't) now the only question is at what level do you think that harm to the economy reaches a point to stop economic growth?

(P.S. I'd love to see some sources for the idea that one $100k job creates 50 other jobs - unless they are $2,000 a year jobs that is...)

[GoIllini]

I'm glad you agree constantly increasing oil prices are harmful to the economy (especially after 2 pages of citing all the reasons they aren't) now the only question is at what level do you think that harm to the economy reaches a point to stop economic growth?

Well the US produces more oil today and consumes less to run the economy and that change has helped offset a lot of the damage done by higher oil prices. And if we become a net exporter like Bakken promises to help us become, oil price increases help the economy rather than hurt it. In other words, we're in better shape than 2008.

To answer your question, the US had an oil trade deficit of (20 mmbpd consumed- 5 mmbpd produced)=15 mmbpd x ~ $120/bl average in 2008. that works out to $1.8 Billion/day. Today, with Bakken pushing us up to 6 mmbpd of production and consumption down to 18 mmbpd with GDP staying about the same inflation adjusted, we are looking at more like a sustained $150/bl to start forcing contraction. High oil prices bad, Bakken good, America in 2011 better at dealing with triple digit oil than 2008 let alone 2001.

Of course contraction could happen from a lot of different places besides oil, including Europe.

(P.S. I'd love to see some sources for the idea that one $100k job creates 50 other jobs - unless they are $2,000 a year jobs that is...)

http://en.wikipedia.org/wiki/Money_multiplier

You should know this Pops- Matt Savinar detailed the money multiplier extensively on his old site.

[smiley]

To answer your question, the US had an oil trade deficit of (20 mmbpd consumed- 5 mmbpd produced)=15 mmbpd x ~ $120/bl average in 2008. that works out to $1.8 Billion/day. Today, with Bakken pushing us up to 6 mmbpd of production and consumption down to 18 mmbpd with GDP staying about the same inflation adjusted, we are looking at more like a sustained $150/bl to start forcing contraction.

So when I start a company, I import 1 million barrels of oil, convert it to something (say computers) and export those, I am bringing the economy closer to the edge? That's what your logic says.

I think this is not the right approach to the question. The key to at which price level the oil price starts to affect the economy is when the oil price causes a sufficient rise in product prices to change consumption patterns.

That is typically when consumers who are stretched out to the limit fall trough, and when producers who are unable to pass their energy prices to consumers have to start laying off people or get out of business.

http://southeastfarmpress.com/managemen ... rmers-hard

But, just as our farmers are getting to the point where they can make a decent living from food prices, another issue has come into play. Input costs have risen so rapidly and so dramatically that it’s unlikely many of our farmers can continue to make a decent living.

http://www.charlotteobserver.com/2011/0 ... fears.html

Conklin said commercial fishermen pay for their own fuel before going out to fish, and the increased cost just means "less money for the fishermen."

"Their families rely on that money," said Conklin. "So when fuel prices go up, it'll mean things like little Johnny might not get a new backpack this year."

But of course these people can all go work in the Bakken area.

High oil prices bad, Bakken good, America in 2011 better at dealing with triple digit oil than 2008 let alone 2001.

That stands undisputed, the question is by how much.

[GoIllini]

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?

Well, the other money multiplier effect is the consumer savings rate. One consumer spends $100 on goods made by somebody else. That person saves 5%, then goes out and spends $95, the guy who sold to him saves 5%, and goes out and spends $90.25, etc. etc until you get 1/5%= 20x the infusion of cash.

So if we discover more oil, the impact on the economy is a lot more than just that one job. Now you have to hire waiters and waitresses to work at the restaurants near the work sites. Those people need day care. Now you need to build a grocery store, a bank, a post office, a police station, fire services, etc all to support the people providing support to the people working in the oil industry.

Likewise, shutting down an oil well does a lot more damage than just one job. At least theoretically, economists say the multiplier is 1/the savings rate, which was 1% in 2008. I will concede that in reality 1 $100K/year oil job probably doesn't translate into $10M if you'll concede that a lot besides just oil prices were at play in your $10M figure.

[Pops]

Concur.

[dissident]

Canada has more oil than SA? Please, let me know when Canada starts producing 9mbpd. I don't care what you have in the ground, only what you can get out of it. I need to drive. You guys produce a whopping 1.5mbpd? Wow. In oil business, that's like saying you have a 1.5" penis. And, according this article, by 2025 you may get it up to 3.5mbpd. You'll still be three inches short of average.

http://www.economist.com/node/17959688

This is a story which is receiving very little attention. The tar sands boosters were claiming that production would be at 5 million bpd by 2020. But the production picture keeps getting worse and now it is supposed to be 3.5 mbpd by 2025. Alberta will be lucky if it is producing 2 mbpd when 2020 rolls around. Meanwhile depletion from conventional fields between 2010 and 2020 will be about 15 mbpd assuming a fixed annual decline based on 2% decline in 2010 production. Non-conventional oil production is not going to save us.

[smiley]

(P.S. I'd love to see some sources for the idea that one $100k job creates 50 other jobs - unless they are $2,000 a year jobs that is...)

Well, the other money multiplier effect is the consumer savings rate.

If that were true then the unemployment issue would be very easy to solve.

Say current unemployment is running 13 million (~10%). That would mean that you would need to create 13.000.000/50 = 272.000 jobs that pay $100.000, to eliminate unemployment. That would pan in at a total of $272 billion per year, or less than 10% than the annual federal expenditures.

So if the government would be paying extra 272.000 people to fiddle their thumbs, it would completely eradicate unemployment. Sounds easy doesn't it?

Actually the government already conducted this experiment. In 2010 they hired 700.000 workers for the census. Although I suspect that they weren't payed a $100.000 per year, and admittedly the period was very short, the unemployment rate showed no evidence for a multiplier effect whatsoever.
http://www.esa.doc.gov/sites/default/fi ... growth.pdf

It is a tortiose and the hare type puzzle, difficult to crack, but I think the problem with your reasoning is that in the case of fractional banking, money is actually created. A bank can bring money into existence. An oil well only produces oil, a waitress only producess coffee. The money is not created, it is simply diverted within the normal circulation.

[evilgenius]

Smiley, there is a multiplier. You are right, it does not consist simply of spent money within the economy. If it did then historically Welfare and Social Security would have had a higher multiplier than they have. The fact is that Welfare and Social Security have always had a low multiplier when compared to defense spending. You could argue that is because people working for defense contractors spend more money locally, and at a wider variety of places. Economists have, however, pinned the difference on exactly what you mention, the ability to borrow. People working for defense contractors tended to live at a level where they could think about taking out a mortgage. This being the case your example of Census Workers is a bad one. Census Workers are not in a place due to that employment to consider taking out loans. The best they can do is keep on paying their bills and maybe make a few additional trips to the liquor store.

[smiley]

People working for defense contractors tended to live at a level where they could think about taking out a mortgage.

Now that's a scary thought. It is true though.

If everyone would use their money to get a loan, you would get a multiplier effect. Especially if it concerns consumptive loans. But this would be a temporary effect as a loan per definition is a form of advance spending. You spend money which you expect to receive in the future, now. While it temporarely boosts your spending ability it restricts your spending ability in the future.

I think the only way to get a structural multiplier is to create real tanglible value. I can see how defence contracts can work to that purpose. Look for instance at the GPS (NAVSTAR) system. Here Defence spending has led to a new higher order product with an intrinsic value thereby increasing the value of the US as a whole and hence allowing for more jobs. I guess the costs associated with that program have payed themselves back by now.

Maybe I'm old fashioned in my ideas and te new world economists will prove me wrong, but when CNN is repeating its daily mantra that the US economy is depending on consumer spending, I still think they are mistaken. It's not how you spend your money now (or how much), but how you invest in the future which determines the economic outlook.

On that note: When I look around on google maps and see all that effort being done to change North Dakota into a giant Emmerthaler cheese I can't help to wonder whether all that effort would not be better spent to develop some energy efficient technology than to drill a zillion marginal wells to scave a few cents of the gasoline price.
http://maps.google.nl/maps?gcx=c&q=will ... a=N&tab=wl