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http://www.eia.doe.gov/emeu/mer/pdf/pages/sec1_16.pdf

http://4.bp.blogspot.com/_otfwl2zc6Qc/SxrzyA2fV4I/AAAAAAAAMDg/mXGVnHnUv38/s1600-h/energy1.jpg

PeakTrader: Many assume the 1995-00 superbubble (more of a production than consumption boom) was not good for the economy in the long-run, and unaware there was another superbubble (more of a consumption than production boom) from 2002-07. However, both bubbles benefited the U.S. tremendously.

A third superbubble, from 2009-14, would've been more of a production boom, to correct global imbalances, e.g. through the market power of U.S. exports and rising real U.S. wages. However, the collapse of credit after Lehman and Obama's economic policies will likely create a "Lost Decade" instead.

OA: "Cheap" is relative. It was in the $30's 12 months ago. $140 was clearly a ridiculous overshoot, but there's nothing really being done about demand. Solar and wind aren't going to displace oil.

People in the US can cut down from an SUV to a better mileage car, but in most of the developing world, they're going up from nothing to motorcycles or small cars. Doesn't matter that they're using more efficient vehicles, the demand jumps anyway.

China has a trillion more people than the US, so it doesn't take a big percentage of them going from the farm to the city to sustain demand.

Brazil and much of Asia are ahead in using alternatives, but those really work best for small cars and fleet vehicles like taxis.

Lower prices from here? Very possible. Fundamental change in demand? Not for a while.

PeakTrader: OA, I agree with much of your statement. However, if "$140 was clearly a ridiculous overshoot," why isn't $30, in the depths of a deep recession, clearly a ridiculous undershoot? Global oil production over the past five years suggests we've reached peak oil. Yet, the population explosion and growth of developing economies will continue.

The efficiency gains on the U.S. production side were utilized on the consumption side. U.S. production became lighter, while U.S. consumption became larger. Of course, Obama's slow growth policies, shifting to smaller and fewer assets and goods, raising taxes, switching to expensive alternative energy, conservation, etc. will lower demand.

It should be noted, oil is concentrated in a few small regions, e.g the Middle East, Venezuela, the Gulf of Mexico (where hurricanes take place), etc. Also, even at $140 a barrel, oil is still a relatively cheap form of energy.

OA: PeakTrader said...
OA, I agree with much of your statement. However, if "$140 was clearly a ridiculous overshoot," why isn't $30, in the depths of a deep recession, clearly a ridiculous undershoot?

I omitted a few words. I meant to say $65 or $70 may be "cheap" but it was in the 30's a year ago. I do think $30's was a ridiculous undershoot. It hasn't seemed to be a deep recession as far as oil demand is concerned. I don't have good sources, but near as i can tell, global oil demand dropped mid year but was right back up into the end of last year. Not in the US of course, but we're not talking 10% down, closer to flat.

Production increased through the $100 prices so that there was a big glut when things hit the wall. But that was temporary as global demand came back up.

So I'm totally comfortable with the oil related holdings in my retirement accounts. Oil might dip a bit and even stay within a range, but long term, the demographics of the developing world are hard to overcome though efficiency.

Lyle: Raise the price of energy more and more efficiency will appear. For one example of efficiency changes consider continuous casting of steel. It used to be steel came out of the furnace, and went into an ingot, that was then re-heated to roll. Today molten steel from the furnace goes into the caster, and then to the hot rolling plant with no re-heat. This reduces the energy intensity of steel making.

VangeIV: This is just another example of delusional thinking. While there is little doubt that mankind will figure out a way to come up with viable alternatives (and no, wind, solar, ethanol are not viable) we will have a major problem between here and there as the implications of peak oil become evident.

PeakTrader: Release Date: May 27, 2009
Next Release Date: May 2010
World Energy Demand and Economic Outlook

"In the IEO2009 projections, total world consumption of marketed energy is projected to increase by 44 percent from 2006 to 2030. The largest projected increase in energy demand is for the non-OECD economies.

In the IEO2009 reference case, world energy consumption increases from 472 quadrillion Btu in 2006 to 552 quadrillion Btu in 2015 and 678 quadrillion Btu in 2030."

My comment: U.S. spending on expensive alternative energy makes oil cheaper for developing countries.

Daniel: No, we will never run out of oil, but the phase of cheap oil has already passed us. When you consider that the IEA says we will need to bring online the equivalent of 4 Saudi Arabias by 2030 just to maintain current production, or Exxon's recent $100 a barrel bid to the Ghana government to gain a quarter access to the Jubilee Oil Field (which doesn’t even cover the cost to develop the field), I think you get a good idea of where things are likely to head.

PeakTrader: I believe, the comments about price is an excellent point. Much of the peak demand of BTUs in the U.S. is the result of higher prices and conservation, although Dr Perry's data also reflect enormous efficiency gains. It seems, there will be a combination of higher prices and further efficiency gains, including for oil, which is a depletable resource.

Historical Crude Oil Prices by InflationData.com shows oil fell to an average of $11.91 a barrel in 1998, which helps explain the U.S. production boom. Also, the "Peace Dividend" was another significant factor.

Which is a form of gasoline efficiency? (pick any or none):

A. Your Hummer getting 11 instead of 10 miles to the gallon.

B. Stop driving your Hummer (creating an idle asset), because gasoline prices are too high.

C. Switching from a Hummer to a Smart car.

I would say only A is really a form of gasoline efficiency.

Government spent your future. All that's left is to collect the bill.

Of course, it depends on cost. Increasing miles per gallon can be cheap, e.g. inflating tires or a tune-up. Technology advances can be cheap when distributed to many autos. However, being forced into fewer and smaller assets and goods may not be a form of efficiency.

RJS: Whether we reach peak oil or not, we're on a curve of diminishing returns...the first oil extracted from texas cost one energy input for every 90 units of energy output; the current ratio energy input to energy output to extract new oil is now one to three...

PeakTrader: There's no viable substitute for oil. When the price of steak rises, people can switch to fish, chicken, etc. However, when the price of oil rises, you go without or consume smaller portions.

Lyle: There are viable substitutes for oil except today for aviation. Natural gas powered vehicles have existed for a while, electric railroads exist in parts of the us, while not done there is no reason one could not build a natural gas powered ship.

There are transition costs involved some of which may be large, but high prices pay for the transition costs very nicely. A supertanker may take a while to turn but it will turn and the more power (money in this case) you put on a side thruster the faster it will turn.

Essentially peak oil says the oil market is so special that the laws of economics have made an exception for it. There may be some pain, it may cost a good bit of money we might have wanted to spend on something else but the transistion will be made if needed.

Colin: I think some of you are missing the post's point. The argument is not that we will never run out of oil, it's that it doesn't matter. If oil is running out it will encourage both a shift in behavior as the price runs out as well as encourage investments in new technologies. When oil runs out we will have already shifted to a new source to meet our energy needs.

PeakTrader: Colin, that's obvious. However, what have been the mechanisms adjusting to Peak Oil or high oil prices so far, and what do you expect over the next decade or two?

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Canada’s top economist Jeff Rubin predicts $225 for a barrel of oil by 2012
25 June 2009

Jeff Rubin...frequently ranked as Canada's top economist...predicts that one barrel of oil will cost 225 dollars by 2012.

In 2000, Rubin correctly predicted that oil would top 50 dollars per barrel by 2005. And, in 2005 he got it right again, forecasting prices would top 100 dollars per barrel in 2007.

"It's not just about depletion [of OPEC oil fields], though depletion is playing a key role. It is also about the explosive growth of oil consumption in OPEC countries themselves. This is the reason why exports have not grown from OPEC in the last five years; they are in effect cannibalizing their own exports.

Every year we lose four million barrels a day [of production due to depletion]. Over the next five years, we are going to have to find 20 million barrels a day of new production, just so that we can [continue to] consume what we consume today.

We think that efficiency leads to conservation but history has shown that is not what happens.

The average engine today is 30 percent more efficient than the engines produced before the OPEC oil shocks [of the 1970s]. Yet, the average [North American] vehicle consumes just as much gasoline in the course of a year.

Back in the 1970s, we [North Americans] used to drive about 9,000 miles a year, now we drive 12,000. Back in the 1970s, we weren't living in the far-flung suburbs. All those gains in efficiency have led us to, ever more efficiently, consume more and more oil."

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PeakTrader: There may be at least two major problems with climate models:

1. Economists cannot create a sound general equilibrium model of a large economy, in part, because of the interactions and interrelationships of hundreds of major dynamic forces (in hundreds of dimensions). Yet, larger and more complex sound models can be created by climatologists?

2. The data are limited, e.g. going back to 1850. Given the cycles within cycles of climate change, several hundred thousand years of data are needed (at a minimum). It's similar to an economist using one day of data, e.g. hourly or minute data, to describe a macroeconomy.

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PeakTrader said...
The U.S. may have reached peak housing, in square feet, and peak autos, in size. 2007 may be a peak for many things, perhaps for several decades.

So, if the U.S. reached peak housing, in square feet, and peak autos, in size, etc., the recession may have been caused by an oil shock, initially, because of peak oil. Either oil production had to increase or economic growth had to slow.

U.S. real GDP growth peaked in late 2007, while the price of oil rose from $50 a barrel in Jan '07 to $147 a barrel in Jun '08.

Anonymous said...
the recession may have been caused by an oil shock

Hamilton thinks that the experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.

http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009_spring_bpea_hamilton.pdf

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