Whither Oil Prices
In July, oil prices overshot on the upside; now they are overshooting on the downside.
That’s the situation in a nutshell, but the back-story is more interesting and instructive than the lead.
When the cost of a barrel of crude was pushing $150, most Peak Oil writers (the present one included) were underscoring the fundamentals of demand and supply: new demand from China and the exporting countries themselves; no significant net increase in production since early 2005.
Well, as it turned out, some higher levels of supply did eventually materialize (July 2008 appears to have been the all-time peak month for crude delivery), and since then the price has fallen by more than half.
But if the price run-up was due mostly to fundamentals and not to speculation, can the same be said for the price rout?
Actually, yes—but with a caveat. Clearly, speculation has indeed played some part in both the price upswing and the subsequent crash as a magnifier of existing trends, but it is the trends themselves that are ultimately decisive. And the trend now is for falling demand. Big time.
Investors are running scared, and rightly so. The scale of the financial catastrophe now unfolding is truly awful: no one knows how far the economy will unwind. It’s a truism that folks will not be buying oil or petroleum products if they don’t have the money, and it appears to be a good bet now (if anyone’s still in the mood for betting) that most consumers are going to have a lot less real money in their pockets soon than they are accustomed to having.
How far could demand fall? Just take a look at the graph for world oil production history to date. It’s mostly a long march upward, with the prominent exception of a giant notch corresponding with the oil price shocks of the 1970s and early ’80s. Production history effectively equals consumption history. The graph shows indisputably that demand is capable of falling dramatically, given the conditions.
And that is the fear we are seeing in the oil patch. Never mind that the price has now fallen below the cost of bringing a new marginal barrel of oil into production; that new barrel won’t be needed for a while. We have plenty of old oil for the time being, thanks. Drill here and now? With whose money?
The game has changed. As I wrote here, “When the world finally begins to recover from its financial turmoil (and this could take a few years), and oil demand picks back up again, the economy will bump up against oil supply constraints and petroleum prices will skyrocket, undermining the economic recovery.” Lack of investment in new production projects, plus ongoing depletion and rising decline rates, probably ensure that we’ve now seen the all-time peak. It was in July 2008. Mark your calendars. That month was probably also, as I wrote here, the end of aggregate world economic growth as it has thus far been defined.
Whither oil prices? Don’t expect a sustained rally for a while. It will be months before the full impact of the financial detonation is known, and that impact could include a substantial, years-long destruction of demand for oil.
That’s a good thing, in that we will be using less. It’s not so good if we don’t prepare for what comes next. However nasty this economic recession or depression might prove to be (and we know from history that depressions can be pretty bad), the consequences of Peak Oil will be much worse—unless policy makers take advantage of the interim period to put in place a New Eco-Deal of investment in alternative energy, home energy retrofit, public transport, grid rebuilding, food system renewal, and job retraining.
Your analysis is correct but it makes the job of conveying the urgency of implementing mitigation strategies to deal with peak oil even more difficult
The powers that be are pulling the plugs and dumping the loot over the sides as she goes down my friends.
Do you believe the FBI is understaffed and does not have enough agents to investigate this? No really, do you honestly believe that this is possible by accident? And then we can consider that even if they had enough people they would have had a whole week or so of "specialized training" so they could surely uncover the misdeeds of a few thousand harvard business grads uhm yeah ok...
After watching Oil, Smoke and Mirrors - I use to make my rounds shouting HEINBERG HEINBERG HEINBERG!!! because it certainly seemed like our good friend was wise to this game.
It is like you said Richard, we find ourselves daily falling back into the almost mythical mindset of our most recent past, right before we learned this new critical information.
All I can say now is ZEITGEISTMOVIE ZEITGEISTMOVIE ZEITGEISTMOVIE!!!
Yes, the game has changed and so have we yet I am almost certain that it was not for the better.
and Divided we fall...
The way things are playing out, it looks more and more like the "long descent" scenario. Like you say, just when we think we are out of the woods economically (which won't happen soon) we'll hit the limits of our resources again.
But, it will be a long and gradual process, and it seems to me that once a particular step in the process becomes obvious to everyone, they will simply accept it and go on with life. The current economic crisis is a case in point. A month ago you couldn't talk about the Great Depression, now almost everyone is talking about it as if we are quite likely to go through something like it. Yet I don't see people panicking in the streets. People will fight or ignore the peak oil problem again too, until it becomes too obvious to fight or ignore. Then it will be accepted by everyone and we'll cope some way or another, as uncomfortable as it may be, and as little time as we may have left to do any kind of mitigation. But I see less and less possibility of a sudden collapse. It could still happen in ways we don't expect though...
Post new comment