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Hey, "serious" people - please listen to the IEA

by Jerome a Paris Tue Jun 10th, 2008 at 05:55:53 AM EST

IEA says high oil prices needed to cap demand

The IEA said in its monthly oil market report that “supply growth so far this year has been poor and higher prices are needed to choke off demand to balance the market”. It added: “Abnormally high prices are largely explained by fundamentals”. (...)

In its report, the IEA cut slightly, as expected, its oil demand growth forecast for the year, but surprised the market with a deep reduction in its non-Opec supply growth forecast, leaving the world economy more dependent than anticipated on Opec, the oil producers’ cartel. “This is a case of supply and demand pulling in opposite directions to push prices higher,” the IEA said. “Global market fundamentals showed continued tightness, with constrained supplies and robust non-OECD demand growth.”

'Serious' people have been telling us that current prices were not really justified, or caused by speculation, or unlikely to last as supply is boosted and demand reduced - ie they have been telling us that these prices are temporary and not something that we need to do anything much about.

Well, the IEA is telling us that this is not the case, and that we'd better pay notice. Both supply and demand are still going in the wrong direction, and prices will increase until that changes. Whether we like it or not, it WILL change: the only choice we have is whether this is done in a way we manage (as much as possible) or if it is forced upon us.

This is not a bubble, this is not a temporary phenomenon. Pundits, politiicians: please take notice and start replacing your denial with some much needed sense - and action.


Display:
Do me a favour? Either explain why speculation and temporary geopolitical factors are not contributing any significant amount to the current prices or stop playing them down. I'm not convinced that you won't see prices drop to 75% of the current price in the not too distant future. You seem to think that there is no overshoot of the oil price at all, which seems unlikely to me.
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:02:59 AM EST
There's not enough oil for demand at $75/bbl. So oil is at $130 to kill off a (thin) slice of that demand to ensure that markets balance out.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jun 10th, 2008 at 06:06:32 AM EST
[ Parent ]
What's the time lag on demand though?
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:07:32 AM EST
[ Parent ]
the increase in the Middle East and Asia is going faster than demand reduction in the West, the only place where it is happening on an aggregate basis.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jun 10th, 2008 at 06:15:13 AM EST
[ Parent ]
Put it this way: if you live far from public transport and drive a massively inefficient car, it takes quite a while to change things to a new price regime - for a start you have to accept that the price regime is here to stay, then you have to replace your car or move or find other solutions.
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:08:51 AM EST
[ Parent ]
Which is why the discourse of "serious" people that the situation is temporary is so problematic, because it helps prevent such medium term change as people are told that the current situation is a temporary aberration.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jun 10th, 2008 at 06:16:25 AM EST
[ Parent ]
It depends what they're saying is temporary: US$130 might be. US$100 probably isn't.
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:24:13 AM EST
[ Parent ]
Shades of the Global Warming debate...

Those with a vested interest in the status quo will use any argument they can muster to suggest this is just temporary.

Those with a vested interest in reform will use any argument they can muster to suggest this is a long-term situation and likely to get worse.

So when someone comes with facts in support of one or other position, how do you tell whether they have an axe to grind, or are being selective or falling prey to confirmation bias?

And when the two camps above hit upon suitable frames where their preferred policy conclusion follows more easily, you'll have a clash of frames and no debate will be possible.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 06:44:47 AM EST
[ Parent ]
Migeru:
Those with a vested interest in reform will use any argument they can muster to suggest this is a long-term situation and likely to get worse.

A vested interest in survival, surely?

It's not story-telling - it's the difference between people who can do rational planning, and people who don't see why they should have to.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 10th, 2008 at 07:24:19 AM EST
[ Parent ]
That, too.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 07:25:20 AM EST
[ Parent ]
But more like "survival of the most people possible". Those with "a vested interest in the status quo" think they'll come up on top of any collapse of the dung pile.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 07:29:30 AM EST
[ Parent ]
How expensive does petrol have to become before it's cheaper to buy a new car and/or move than it is to keep paying higher prices?

An efficient new car and/or a move will typically cost thousands, so there isn't a huge amount of elasticity there. Assuming people can do the numbers, the pain has to be severe before they're forced to change. Also a lot of oil goes to industry, which is even less flexible.

So I'm not expecting prices to decrease. It's going to be months before demand reduction in the West has an effect on price, and it's not clear that China and India won't make up the slack regardless.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 10th, 2008 at 06:20:23 AM EST
[ Parent ]
It's not clear that they will either.

People are getting tunnel vision.

by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:23:14 AM EST
[ Parent ]
China's oil consumption hits record high in Q1_English_Xinhua

    BEIJING, April 29 (Xinhua) -- Soaring oil prices have not slowed China's consumption of oil as statistics show that China's apparent consumption of crude oil and refined oil products both hit record highs in the first quarter of the year.

    According to statistics released Tuesday by the China Petroleum and Chemical Industry Association (CPCIA), China's apparent consumption of oil products composed of gasoline, diesel and kerosene rose by 16.5 percent year on year to 52.73 million tonnes in the first three months, and crude oil, rose by eight percent to91.8 million tonnes.

    The "apparent consumption" represents the sum of net imports and output and could be taken as an index for the real oil consumption excluding inventory.

    The growth of oil products consumption was a record high and much higher than the same period of last year, which was only 3.6 percent, said Shu Zhaoxia, professor of the Economics and Development Research Institute of China Petrochemical Corporation (Sinopec Group). Sinopec Group is China's top oil refiner.

    The growth of crude oil consumption was 2.5 percentage points higher than a year ago.

    State ceilings on prices of domestic oil products was the major reason contributing to China's surging oil consumption in the first quarter.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 10th, 2008 at 06:35:47 AM EST
[ Parent ]
How long can they afford to do that for?
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:41:20 AM EST
[ Parent ]
With the huge ocean of dollars that China's currency reserves are floating in, about as long as they want to.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 10th, 2008 at 07:17:49 AM EST
[ Parent ]
Oh, so now I'm not wrong for saying that?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 07:24:32 AM EST
[ Parent ]
"How expensive does petrol have to become before it's cheaper to buy a new car and/or move than it is to keep paying higher prices?"

In the previous energy crises in the U.S., the problem was not one of high prices but of unavailability. It didn't matter how much money you had, there simply wasn't any gas at the gas station.

In that case, the cost of a newer car is irrelevant.

by asdf on Wed Jun 11th, 2008 at 12:28:01 AM EST
[ Parent ]
That was because the fools interfered with the very efficient gasoline market.

Price controls-> shortages.

There were no price controls during the second oil crisis in 1979, and there were no shortages either.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jun 11th, 2008 at 07:38:53 AM EST
[ Parent ]
Price controls without by-fiat rationing creates shortages.

But then again, absence of price controls creates by-wealth rationing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 11th, 2008 at 08:26:14 AM EST
[ Parent ]
But without price controls you can still tax the sales and use the proceeds to support those who can't afford the product.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed Jun 11th, 2008 at 08:28:04 AM EST
[ Parent ]
If there is less stuff to go around than people wish to use, you are not going to escape rationing, one way or the other. No amount of moving funny-money around by way of tax-and-subsidise systems will make more stuff in and of itself.

So you'll get a milder form of by-wealth rationing - one in which the people who are flat out of luck are at least compensated for their being flat out of luck.

Did I miss anything?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 11th, 2008 at 09:05:01 AM EST
[ Parent ]
Rationing by price is by far the most efficient way of rationing when it comes to gasoline.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jun 11th, 2008 at 09:28:54 AM EST
[ Parent ]
Should we look for "efficient", or should we look for "fair"?

After all, no citizen has an innate claim to more of the stuff than any other, given that it's all imported and thus heavilty dependent on public infrastructure and institutions to be available to us...

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

by Jerome a Paris (etg@eurotrib.com) on Wed Jun 11th, 2008 at 12:55:03 PM EST
[ Parent ]
Let's not mix up efficiency with fairness. Gasoline is most efficiently distributed using price as the rationing variable, as are almost all goods.

Fairness we get through the progressiveness of the income tax system.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jun 11th, 2008 at 07:06:59 PM EST
[ Parent ]
This would seem to argue against prices going down in the medium term, because people need to change their habits in order for that to happen.

By the time the price is ready to go down by 75%, the decline in world oil production or the increase in demand from developing countries will have picked up the slack.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 06:24:59 AM EST
[ Parent ]
Assuming that the high prices haven't collapsed their economies.
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:26:21 AM EST
[ Parent ]
Well, at that point we have to start getting actual macroeconomic data and doing the numbers to figure out where the strongest stresses are and thus where the likely breaking points are.

This situation is so past linear.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 06:31:22 AM EST
[ Parent ]
Way past linear.
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:35:58 AM EST
[ Parent ]
To paraphrase Amartya Sen on famines, if oil prices crash an economy it will be for political reasons.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 06:32:26 AM EST
[ Parent ]
Does that follow?
by Colman (colman at eurotrib.com) on Tue Jun 10th, 2008 at 06:37:37 AM EST
[ Parent ]
It depends on the definition of crash.

You can have a decline in GDP without large swathes of the population falling into poverty, but it takes a massively interventionist economic policy on the part of everyone.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 06:41:09 AM EST
[ Parent ]

Insight: Oil will move higher

The declining dollar, the rhetoric of energy independence, increased energy consumption in oil producing countries, and power shortages in the Gulf States that are enouraging "private generation" are key factors that will push oil prices to new records. Add political instability in some oil producing countries, natural disasters, and technical difficulties around the world, and we are looking at an energy crisis in full bloom, with no end in sight.

This is more than a small quote, but it's very noteworthy:


Dollar devaluation reduces oil supplies and increases the demand for oil. The result is a steady increase in oil prices. A prolonged decline in the dollar reduces the purchasing power of oil producing countries and increases the costs of international oil companies. As a result, the amount of money allocated for reinvestment in oil production declines. A decline in the dollar increases the demand for oil in countries with appreciating currencies and reduces the negative impact of rising oil prices on their economies.

■ Most Republicans in the US link oil to terrorism and call for energy independence. Democrats link oil to global warming and call for energy independence. Others link oil to dictatorship and call for energy independence.

The oil-producing countries would have ignored this silly rhetoric had it not led to billions of dollars in research grants and direct subsidies for corn ethanol, soy biodiesel, and other energy sources. The explicit intent of these policies is to replace oil, the life blood of these countries. Thus oil producing countries take the rhetoric of energy independence seriously. They are redirecting investment from the oil industry to energy intensive industries and other projects to export oil embedded in various industrial products. The effect is clear: slow expansion in oil production capacity and an increase in domestic energy consumption. Inevitably oil and gas exports will decline and world oil prices will increase.

Energy consumption in the Gulf region has exceeded all expectations. This massive and unpredicted growth has led to energy shortages. Almost all of the natural gas in most of the oil producing countries, including gas from unfinished projects, has been allocated to petrochemicals, production of electricity for local consumption, and various industrial uses. Since fuel oil supplies are also limited, u*se of crude oil in power generation has become an objective of policy makers* who decided to subsidise heavy oil to make it competitive with natural gas in power generation. This trend means that the use of crude oil will increase over time. This increase will be at the expense of excess capacity and exports.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jun 10th, 2008 at 06:12:33 AM EST
[ Parent ]
Jerome a Paris:
Thus oil producing countries take the rhetoric of energy independence seriously. They are redirecting investment from the oil industry to energy intensive industries and other projects to export oil embedded in various industrial products.
And that's a great thing because the worst oil producing countries can do after peak oil is to continue pissing their oil resources away by exporting them for fuel.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed Jun 11th, 2008 at 05:27:18 AM EST
[ Parent ]

Record gas price to drive up UK energy bills

UK consumers and businesses are set for another steep rise in energy bills after the wholesale price of gas hit a record on Monday, driven up by the soaring cost of oil.

The price of gas for next winter rose above £1 per therm for the first time in the futures market, more than double last winter's average of about 48p per therm.

The rising gas price has also sent the price of electricity for next winter up to £88.25 per megawatt hour, up from an average of about £50 last winter.

Industry executives believe it is certain ,retail energy prices will rise, with some suggesting increases of more than 20 per cent,.

(...)

In 2003, the UK was a net exporter of gas; this year, it is likely to have to import almost 40 per cent of its needs.

That means UK prices have to be high enough to attract gas from the continent through the pipelines from Belgium and the Netherlands, or from Norway, where gas producers have the option of selling into either the UK or other European markets.

In effect, a floor is set under the UK gas price by the continental price, which in turn is largely determined by the price of oil, because most gas in Europe is sold on long-term contracts at prices linked to oil and oil products.

Ah, the joys of markets when you have not planned for the future...

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

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 10th, 2008 at 07:21:44 AM EST
what I've been wondering this week is what the time lag is from tanker price to pump price - have the $4 a gallon pump prices in the US fully mapped out the increase to $140 a barrel, or (even excluding any future changes in crude price) do they have further to go?

Interest rate cuts take around a year to shift their way through the economy, the conventional wisdom goes, so we're just starting to see the full extent of the original credit crunch cuts. (it appears to be inflation ahoy). As Jerome mentions at the bottom of the comments, UK energy suppliers are beginning to pass high supply prices on to the consumer. But if we were to freeze the oil price as it is, how long do people estimate until it works it way through the whole system? Is it year-long like interest rates, shorter, or longer?

by darrkespur on Tue Jun 10th, 2008 at 07:35:52 AM EST
Commissioner Andris PIEBALGS: Riots won't bring oil prices down (June 6, 2008)
...

However, the real drivers of oil price escalade have a structural nature. You all know the offer and demand law. If offer decreases, price increases. If there is a growth on demand, there is also a growth on price. If, at the same time offer decreases and demand increases then, price skyrockets. This is precisely what is happening in oil markets.  

...

So what is the solution? Well, we have to move away from oil. This is what the European Energy Policy is all about. We need to reduce demand with more efficient transport, industry and housing. We need to promote alternative fuels, like biofuels, electricity or hydrogen; we need to change to cleaner and more efficient transport modes like rail, short sea shipping, or public transport. And in the meantime, we need to continue our dialog with oil producers to encourage them to produce more and to supply the markets better. On 24th of June, I will meet ministers of the OPEC countries to discuss with them on this issue. 

The era of chap and easily available oil is over. We need to move away from black gold and put our efforts in a low carbon economy. The sooner we do that, the better.



When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Jun 10th, 2008 at 07:36:21 AM EST
The Russians said today that it would be $250 a barrel in 18 months. What would that do to the price of motor fuel? Double it again?
by asdf on Wed Jun 11th, 2008 at 12:25:27 AM EST
I suspect supply contracts of distilled products ay be pegged to oil futures like natural gas is, so quite possibly.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed Jun 11th, 2008 at 02:38:11 AM EST
[ Parent ]
the price of crude represents about half of the price of gas in the US (the rest being refining, distribution costs and taxes), and about a qurter in Europe.

Distribution costs and taxes are more or less constant; refining costs can vary a bit more (in a mostly uncorrelated to oil way), so a doubling of oil prices would, all otehr things equal, lead to an increase of about 50% from today's levels.

But $4 gas does not quite fully reflect $130 oil yes, so you should expect gas to be around $7, probably, with $250 oil.

In Europe, gas is around €1.50/l now, so oil at $250 would presumably put gas at about €2/l.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Jun 11th, 2008 at 04:33:58 AM EST
[ Parent ]
I would imagine that serious people would point to the fact that, as it is only recently that the IEA have increased their estimate for the price of oil in 2010 above $40, they are hardly a forecasting group whose views can be relied upon.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Wed Jun 11th, 2008 at 06:53:18 AM EST
has long been the biggest excuse to do nothing, with their cornucopian forecasts, but they have steadily moved closer to being "strident" (see my various articles in the Countdown series), and are now in a year-long campaign to leak the fact that their November Outlook Report will be substantially different and will flag, essentially, that the party is over and that we will never have the volumes of oil that everybody seems to be expecting in the next decade.

So it is that movement that needs to be listened to.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Jun 11th, 2008 at 07:05:47 AM EST
[ Parent ]
Oh , I agree you're right, although I might suggest they're a dya late and a dollar short now they've noticed the price is rocketing.

However, what I was highlighting the the probability that "serious" people will now choose to ignore them on the grounds of inconsistency.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed Jun 11th, 2008 at 08:15:17 AM EST
[ Parent ]


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