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Countdown to $100 oil (51) - we'll never see 100mbd

by Jerome a Paris Thu Nov 1st, 2007 at 07:33:09 AM EST

With oil prices briefly going over $96 this night, we're definitely within sight of $100 oil. In fact, for all instances and purposes other than the actual symbolic breaching of an arbitrary round number, we are at $100 oil - in terms of burden on the economy, cost of imports, and potential impact on our energy use.

And the big news is - there's no news. There's no recession. It's not a hot political issue. There's no Marshall plan to move to alternative energies. No debate about how to reorganize our economies with scarce and/or expensive oil.

Which points to a simple conclusion: oil is still much too cheap.


And you see cheerleading articles explaining that high oil prices are a good thing as they are a sign of a booming world economy, and that they will go down soon because markets forces will come into play:

f you take the profits of these companies over the past four quarters and capitalize those profits at the appropriate capital cost, you get what each firm would be worth if it were to continue cranking out the past year's profits every year. But in each case the company's actual market value is lower; that is, the market expects each company's profits to fall, for which the only plausible explanation would be declining oil prices.

Or, you know, that their production might decline, as it has over every single of the past 5 years. Because the real news of the day is not so much the oil price today, but this prediction by Total CEO Christophe de Margerie:

The world’s capacity to produce oil will fall well short of official forecasts, the chief executive of Total warned on Wednesday.

In an unusually stark prediction for the head of one of the world’s biggest oil companies, Christophe de Margerie, CEO of the French group, said it would be difficult to reach even 100m barrels a day.

The International Energy Agency, the rich countries’ watchdog, in its “business as usual” projections, has said oil supply will reach 116m barrels a day by 2030, up from about 85m b/d today. The US government has a similar forecast of 118m b/d in 2030, including a relatively small contribution from biofuels.

Mr de Margerie, however, said while forecasts could always change, “100m barrels [per day]?.?.?.?is now in my view an optimistic case”.

He added: “It is not my view: it is the industry view, or the view of those who like to speak clearly, honestly, and not?.?.?.?just try to please people.”

This is a much more significant symbolic line than the $100 barrel. As all official predictions tell us, and as the rapid growth in both emerging countries like China and oil producing countries like Saudia Arabia or Iran underline, demand for oil is very likely to reach that level in less than 10 years unless we see massive behavior changes. Margerie is telling us that we are looking to serious imbalances between likely demand and likely supply in the very near future, and "suggested the tightness of supplies would be likely to keep prices higher."

It's quite simple in fact. Supply is constrained by lack of production capacity (whether this is because of depleted resources or, like Margeris proposes, voluntary limitation of investment by oil-rich countries, is irrelevant). Demand will need to adjust. Prices will thus rise enough to cause demand destruction. Today's prices have only cut growth in the West so far (demand has been flat for 2-3 years even in the US) but nowhere else. So we'll need significantly higher prices to have overall stabilisation of demand, including very real demand reduction in the West and much lower growth elsewhere.

Given how little we've reacted so far, I expect that we'll meed multiples of today's prices to see such changes.

Earlier Countdown diaries:
Countdown to $100 oil (50) - it's no longer 'oil', it's 'liquids'
Countdown to $100 oil (49) - peak oil and libertarians
Countdown to $100 oil (48) - 85, 86, 87, 88, ...
Countdown to $100 oil (47) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - what's a dollar worth?
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact

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Am I wrong if I say that actually 90 $  per barrel has lead to a halt int he increase of consumption in the developed countries.. that is.. Europe, Japan, Australia US and Canada consume tthe same amount of oil as threee years ago.. Is this right?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Nov 1st, 2007 at 08:11:23 AM EST
I don't think we've had oil above $85 for long enough to be able to tell.

We have met the enemy, and it is us — Pogo
by Migeru (migeru at eurotrib dot com) on Thu Nov 1st, 2007 at 09:16:02 AM EST
[ Parent ]
That's right.. but even with oil around 70$... I think the use of oil in developed in coutnries is stagnant and that allt he growth coems from China, India and SouthAmerica..Am I right?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Nov 1st, 2007 at 09:22:13 AM EST
[ Parent ]
The reality id that oil consumption has been essentially flat in Europe over the past 10 years, and even oin the US over the past 2-3 years. That's as much the spread of new technology (direct injection diesel in europe, notably) as the influence of higher prices - which are less visible in Europe given the rise of the euro, and the importance of taxes in price.

Still, one can see that as positive news (especially when you look at numbers like the total number of kilometers driven, which has gone down in France for the past 2 years), and a trend likely to continue.

But one could also focus on the fact that a tripling of the price of oil (oil has now been over $60 for the most part of the last 2.5 years) has changed very little of our behavior - or only at the margins. Substantial change will require bigger "incentives" - ie bigger sticks in that case, ie higher prices.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Nov 1st, 2007 at 09:27:42 AM EST
[ Parent ]
i was talking with my boss the other day.. and he is right.. oil has to go up up up before you can really feel it as "expensive"... travelling is very cheap .. by car.. compared with train ... or planes... One should put the liter of gas at 3 or 4 euros..otehrwise.. it is better to take the car.

So unless they price goes up up up (300-400$)and we can control inflation by moving goods with trains or we will nto see the destruction of demand necessary ...

But it is still good news becuase I expected that we can live with present consumption in the developed countries for more than a decade... 1/4 of emission come from private trasnprotation...drive less move around more with cars compeltely full, or train or bike adn we can keep with the economy going on with basicaly no disruption in otehr sectors... I fear more the bubbles and the lack of train transportation of goods tahn the increase in the price of oil directly...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Nov 1st, 2007 at 11:33:05 AM EST
[ Parent ]
The reality id that oil consumption has been essentially flat in Europe over the past 10 years, and even oin the US over the past 2-3 years. That's as much the spread of new technology (direct injection diesel in europe, notably) as the influence of higher prices - which are less visible in Europe given the rise of the euro, and the importance of taxes in price.

Given that oil consumption has been essentially flat (but likely slightly increasing) even with the strong growing price trend, a simple-minded estimate of the price elasticity of demand not only will give a number very close to zero, but of the wrong sign (i.e., increasing prices would seem to lead to increasing demand!)

The fact is that "price elasticity of supply/demand" have to do with the supply and demand curves considered separately, which are not observable. What is observable is the clearing point, in terms of price and volume as a function of time, not supply and demand as a function of price at fixed time.

So, 1) why do people insist on talking about unobservable supply and demand curves? and 2) what is a proper method for estimating the price elasticity of oil consumption? [I have my own idea but I'd like to know whether there is a "standard" answer]

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 06:10:33 AM EST
[ Parent ]
Maybe more than anything else, the price underscores the  frightening rate at which the money becomes steadily less valuable, its increasing worthlessness and devaluation which are coupled with and encouraged by inflation.
Who's been in a supermarket lately? A good part of this is being brought to you courtesy of the U.S. foreign debt and the U.S. custom of destroying its foreign debt by destroying its currency. Will the world ever tell the U.S. where to get off and stop servicing it? No, because I guess the people who make such decisions are in on the game. Who remembers the hideous stagflation of the 1970s when the Vietnam debt had to be written off? Well, I'll try not to.
by Quentin on Thu Nov 1st, 2007 at 08:24:41 AM EST
I am optimistic.

When the oil companies have squeezed the last drop of profit from the people of the world, someone will go to John D. Rockefeller's safe and take out the plans for the cheap, non polluting alternative to oil. We will then be saved.

Hurrah for big oil, altruism with an inhuman face!

by Gary J on Thu Nov 1st, 2007 at 08:31:56 AM EST

Exxon Revenue Hits Record, But Shrinking Margins Hit Profit

Exxon Mobil Corp. posted a bigger-than-expected 10% drop in third-quarter net income on lower refining and chemical margins, as the company set a quarterly revenue record.

(...)

Revenue rose 2.8% to $102.34 billion, topping the prior record of $100.72 billion set two years ago. Capital spending climbed 7.5% to $5.44 billion.

Upstream earnings - the company's oil-and-gas production business - dropped 3% to $6.3 billion on a 2% drop in production on factors including divestments and its loss of its Venezuelan assets. Helping was higher oil prices. The benchmark West Texas Intermediate crude price averaged $75.25 a barrel during the quarter, compared with $70.50 a year earlier.

Those higher prices have been hurting oil companies' refining profits. At Exxon's downstream business, which buys crude oil and which converts it to products like gasoline, earnings fell 31% to $1.9 billion on slumping margins. Oil refiners have been warning of late of falling margins as the surging crude prices haven't been matching with increases by finished products such as gasoline.

The other majors have shown similar numbers, i.e. declining profits on much lower refining margins.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Nov 1st, 2007 at 09:00:45 AM EST
[ Parent ]
European Tribune - Countdown to $100 oil (51) - we'll never see 100mbd

There's no recession.

This is debatable, I think. Inflation is being systematically under-reported in both the UK and US, and I suspect that if the true growth figures were available they'd either be close to zero or negative.

European Tribune - Comments - Countdown to $100 oil (51) - we'll never see 100mbd

Which points to a simple conclusion: oil is still much too cheap.

Or possibly, politicians are stupid and incapable of much in the way of forward planning.

Never mind. We may have an attack on Iran soon, which will do wonders for oil pricing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 1st, 2007 at 09:04:31 AM EST
I agree that we are already in, or very near a recession, but I don't think it is caused by oil prices. It's caused by the end of the big credit bubble, and all the excesses now turning into inflation and various credit crises. In that context, oil prices are also one of the symptoms of that inflation.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Nov 1st, 2007 at 09:20:04 AM EST
[ Parent ]
Inflation and recession are not caused by the oil prices. But once wide inflation starts biting consumers, that may change their oil consumption behavior faster than the nudging market prices. For time being, everyone can spend (or borrow and spend) whatever money.
by das monde on Thu Nov 1st, 2007 at 09:36:25 PM EST
[ Parent ]
http://www.dailykos.com/story/2007/11/1/926/88320

With the ExxonMobil results included and an added conclusion:


And, if I may again say so:

  • a gas tax would ensure that some of the money from gasoline price increases stay with us for useful investment rather than going in the pockets of unfriendly regimes elsewhere;
  • blaming the oil majors (or speculators) for price manipulation is mostly silly. Their production is declining, their power is waning, and their hold on the market increasingly tenuous. The main drivers today are fast demand growth from the world economy, and the inability of the supply side to keep up - or, to some extent, the unwillingness of some countries to invest as much as we'd like, a perfectly rational decision in today's context: why rush on the market today a product that you know will get more valuable in the future?

The ONLY thing we can control in the long run is our demand. Time to work on demand-side policies rather than supply side policies (hmmm - sounds like a good programme for the Democrats...)



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Nov 1st, 2007 at 09:17:57 AM EST
I for the first time read a few of the older ones of these on kos and followed threads where they happened to lead. Slow day at work. Good stuff...

Some very famous flame wars a few of these occasioned. Quite surprising, I'd have thought. Energy isn't exactly the most controversial topic in left blogostan, unless you are trying to defend Exxon's handling of the Valdez crash or somesuch...

by redstar on Thu Nov 1st, 2007 at 10:53:42 AM EST
Energy is not controversial in the left blogostan, but gas taxes and voluntary demand reduction (as kcurie says, the private car is where demand can be reduced more easily) are controversial in the US, left or right. It's the policy proposals to deal with energy issues that cause the flame wars, because too many kossacks are libertarians.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 05:13:15 AM EST
[ Parent ]
... in terms of US CPI ... having passed the level of 1979 in terms of US GDP-deflator by about 10% ... and so we are still in the range of the previous response to "2007 consumer-purchasing-power-dollars $100 oil" from 1979, which included substantial improvements in technical efficiency of the private motor-road transport system, until the motor vehicle lobby was able to stall that progress.

Which means that its $5/gallon where we in the US start to hit serious trouble based on the price of crude oil alone.

However, the other change since 1979 is the much greater proportion of crude oil imported from abroad, so that in addition to direct price effects, we are also exposed to direct Keynesian effects from an increase in our trade deficit as a result of an oil price spike.

And that risk could be amplified, if China and other sources of much of our consumer goods are pressed into a position of raising their currency peg against the dollar. With the per unit cost of so many imports held stable, the US has not seen a J-curve effect from its currency devaluations, and so our trade deficit has been tapering off in response to the falling US dollar.

However, if we get the double-whammy on our external account of an oil price surge, and an substantial increase in per-unit price of imports, we are going to lose the primary motor for economic expansion that is offsetting the ongoing collapse of the housing market.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Nov 1st, 2007 at 10:57:46 AM EST
whereby

  1. higher gas prices lead to domestic economic growth in oil exporting countries, which leads to

  2. those countries consuming a greater proportion of the oil they produce, which leads to

  3. an effective "demand peak" where they cease to export oil before their supplies run out, which

  4. takes oil off the international oil markets even faster than depletion rates would suggest, which

  5. puts more pressure on the remaining oil exporting countries, whose fields are also subject to the same pressures
by wu ming on Thu Nov 1st, 2007 at 01:33:15 PM EST
I always flag in my stories that oil demand growth is strongest in the oil producing countries. In fact, amongst the 6 biggest increases in oil consumption (in absolute numbers), you have Saudi Arabia, Iran, Russia, Canada, all major exporters - and the US and China, also significant producers themselves.

The tables below do not show exactly this (they are about the biggest variations in oil production), but you can see that info in there indirectly:



In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Nov 1st, 2007 at 02:11:41 PM EST
[ Parent ]
You gotta love the NYT flat-earther Thomas Friedman:

I was visiting an Indian village 350 miles east of Hyderabad and got to watch a very elderly Indian man undergo an EKG in a remote clinic, while a heart specialist, hundreds of miles away in Bangalore, watched via satellite TV and dispensed a diagnosis. This kind of telemedicine is the I.T. revolution at its best. But what struck me most was that just underneath the TV screen, powering the whole endeavor, were 16 car batteries -- the E.T., energy technology, revolution, at its worst.

Some 250 million Indians today have cellphones. Many of them are people who make just $2 or $3 a day. More and more are getting access to computers and the Internet, even in villages. But only 85 percent of Indian villages are electrified -- and that is being generous, since many still don't have reliable 24/7 quality power.

If only ... If only we could make a breakthrough in clean, distributed power -- an E.T. revolution -- it could drive the I.T. revolution into every forgotten corner of the world to create jobs, light up schools and tap the innovative prowess of rural populations, like India's 700 million villagers.

If only... Don't people learn any basic physics anymore? Energy is not something you can create out of nothing; energy cannot be concentrated at will.

Can't we ever assume that the energy revolution might not come at all?

by das monde on Thu Nov 1st, 2007 at 09:45:51 PM EST
You're obviously not an economist or a pundit.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Nov 3rd, 2007 at 04:43:26 AM EST
[ Parent ]
[Moustache of Understanding Alert]

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 05:04:38 AM EST
[ Parent ]
I would not be so negative. The "energy revolution" might come from distributed microgeneration.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 05:11:02 AM EST
[ Parent ]
I'm not sure about "Micro" - those little windmills they flog in B&Q are a joke, and solar panels have got some way to go yet, as I understand it.

Far more mileage in "Meso" community projects on a neighbourhood and area (multiple neighbourhoods) scale basis, I think, both in terms of renewable energy generation, and in retrofitting energy efficiency (Negawatt) measures.

But the boundary of Micro and Meso is grey. Of course, there could be some big wins in urban distribution of hot water from current plant by "CHP'ing" them, although the current distribution of UK generation doesn't give that much opportunity.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Nov 3rd, 2007 at 07:43:43 AM EST
[ Parent ]


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