The oil scene Many were stunned this year to witness the parabolic rise and fall of oil prices up to nearly $150 and then back around $36 by Christmas time. Quite a ride. I said in The Long Emergency that volatility would be the hallmark of post peak oil because it was obvious that advanced economies could not absorb super high prices and would crash in response; that at some point after crashing, these economies would respond to the new lower oil price, resume their cheap oil habits, and build to another price rise. . . and crash again. . . in a declension of ever-lower industrial activity..... Even if these advanced economies -- throw in Japan too -- remain moribund, the price and supply prospects for oil look ominous. My own guess is that the price of oil has overshot on the low end just as it overshot on the high end, and that, when all is said and done, we'll still see an upwardly trending price line over the long haul. The plunge, which began right after the $147 peak in July 2008, was as much the result of banks, hedge funds, and individuals dumping oil investments and positions to raise cash as it was a matter of the markets predicting a sharp fall-off in economic activity (and supposedly oil consumption). The truth is that demand destruction for oil in the USA has been surprising mild compared to the drop in price. Jim Hansen's Master Resource Report says that <b<gasoline consumption dropped from 9.29 million barrels a day in 2007 to 8.99 million barrels a day for 2008.</b> That's not much of a fall-off, especially compared to the price drop.
Many were stunned this year to witness the parabolic rise and fall of oil prices up to nearly $150 and then back around $36 by Christmas time. Quite a ride. I said in The Long Emergency that volatility would be the hallmark of post peak oil because it was obvious that advanced economies could not absorb super high prices and would crash in response; that at some point after crashing, these economies would respond to the new lower oil price, resume their cheap oil habits, and build to another price rise. . . and crash again. . . in a declension of ever-lower industrial activity..... Even if these advanced economies -- throw in Japan too -- remain moribund, the price and supply prospects for oil look ominous. My own guess is that the price of oil has overshot on the low end just as it overshot on the high end, and that, when all is said and done, we'll still see an upwardly trending price line over the long haul. The plunge, which began right after the $147 peak in July 2008, was as much the result of banks, hedge funds, and individuals dumping oil investments and positions to raise cash as it was a matter of the markets predicting a sharp fall-off in economic activity (and supposedly oil consumption). The truth is that demand destruction for oil in the USA has been surprising mild compared to the drop in price. Jim Hansen's Master Resource Report says that <b<gasoline consumption dropped from 9.29 million barrels a day in 2007 to 8.99 million barrels a day for 2008.</b> That's not much of a fall-off, especially compared to the price drop.
The answer lies in the relative inelasticity of supply and demand in oil markets.
At 83-84 million barrels daily, we are at the very frontier of production. You have to go far out to sea, or start manufacturing oil from unconventional sources like sands and super-heavy fields to get more. And that takes time. In the short term, no amount of money is going to bring those sources online. There is no excess capacity, and the Saudis are probably lying about what they can pump, so it looks worse if you're an oil trader.
At the same time, demand is inelastic. In places like the United States, driving is often a necessity, not an option. If you want to get to work or shopping, it has to be in a car. The very structure of the urban landscape demands it. So it takes gigantic leaps in price to produce reductions in demand, because there's little slack to be cut in the short term. Slack comes in thinks like combining trips to the store, or forcing the poor out of their cars onto bikes, public transportation, or their feet in a landscape not designed to accomodate this, or up and moving closer to work and shopping. But that last one takes time. Most leases are for a year, and selling a house takes even longer. In the short term, these things aren't going to occur.
So what we get is something like this.
I'm oversimplifying of course, but that's because I don't want to trace out something else than a straight line.
So I think that Kunstler is right about one thing.
We are in for a serious period of energy instability, where every push to economic recovery produces a rise in energy prices that suppresses it.
So two things have to occur.
1) Steps have to be taken to change the structure if demand to make it more elastic.
and
2) Any stimilus has to be strong enough to break through the countervaling force of energy prices. And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
If we assume that the "law" of supply and demand holds then prices go up when demand increases, but how much they rise is unspecified by any theory. One can draw a line ex post facto, but that's not a theory.
Something has happened in the oil market over the past decade or so which none of us understand, including the "experts". Look at all the theories: speculation, hoarding, the rise of demand in China, etc. What these theories all have in common is a lack of actual data.
Just looking at other markets in history, it is usually the case that a sharp rise in prices is related to a speculative fever. This has been true for everything from tulips to US homes. It seems highly likely that oil is another instance of this.
Now what is missing is any indication of who the speculative players are. I would guess that they are to be found in the oil producing states and connected with the government in some manner. The lack of reliable reserve and production figures makes manipulation of markets easier.
Oil will rise again when the alternative energy suppliers have been driven out of business or, at least, severely weakened. There is already an economic collapse going on in the Canadian oil tar fields with thousands of workers being laid off. The low prices don't support the cost of extraction.
As with any monopolist enterprise driving the competition out by using low prices gets followed by a return to fixed markets. Jerome is right, just wait awhile. Policies not Politics ---- Daily Landscape
It may be that unusual swings in prices are normally associated with speculation, but it's also true that a swing of $140/barrel to $40/barrel is not an extraordinarily big swing for a commodity market. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
The shape is not specified by any generic theory, of course, because a generic theory must accommodate a wide range of supply conditions, but the generic theory does specify the determinants of the shape of the supply curve. Under the Peak Oil theory of oil supply, from the neighborhood of the oil peak onwards, the supply curve is:
... which is to say, marginal cost of production for existing fields, then transitioning to a bidding war allocation at the production maximum. Over time, exhaustion of the lowest cost of production fields will lead to the supply curve shifting up and in. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
