Memorial Day, 2008: The Tipping Point in the Peak Oil Debate

[GliderGuider]

Memorial Day, 2008: The Tipping Point in the Peak Oil Debate

Like a chorus line turning in unison from left to right, the media and the financial markets turned and embraced the notion of peak oil last week.

It was the price that did it.

In an interview with CNN radio last week, I think the host was rather shocked when she asked me if recent predictions of $12 gasoline in the next few years could happen.

"Easily," I said, "easily." And then explained why peak oil means that prices will have to keep going higher as long as global demand continues higher, because supply appears to be maxed out. Even as demand in the developed world declines due to price-induced demand destruction, the red-hot developing economies of the world are more than making up for it.

There is still much confusion over why oil prices are so high. Some blame speculators, even though the ultimate holder of a futures contract must take delivery of the oil for use in a refinery. Some still point to a "terror premium," even though oil prices have continued straight up as geopolitical events come and go. Others vastly overrate the importance of the declining dollar, or the latest inventory numbers, or pronouncements from OPEC.

(snip description of the IEA's "Come to Jesus" admission of supply limits)

Whatever the IEA's reasons, however, the game is up. Most of the world now recognizes that we are up against a bona fide supply limit, and all the market is doing now is trying to find the proper value of a barrel of finite, nonrenewable, and diminishing petroleum.

[judy]

1. We're indeed up against a limit, and

we definitely need to stop using hydrocarbons. I am glad that it is being recognized.
However, peak oil is still a ways away, and is not what has made the prices soar.
The low dollar - not to be underrated :) -, the Iraq war (almost no oil from Iraq), ill will (antagonizing OPEC), supply manipulation and speculation are what is making the prices go up.
I would add that the US used to be in a good bargaining position with oil producing countries. Not anymore. The US hardly manufactures anything these days, except weapons. Pathetic.

[GliderGuider]

3. How far out is Peak Oil, in your opinion?

A lot of people who've been following the issue for years (including yours truly) think it's happening right now -- what with crude oil production on a three-year plateau, Mexican production crashing, Russia in decline, UK production in decline, Indonesia leaving OPEC because they're now a net importer, and global oil exports starting to fall...

Factors like the weak US dollar and geopolitics are certainly involved in the rising price of oil, but speculation may not be as big a factor as everyone thinks -- see Why oil costs over $120 per barrel on The Oil Drum. One major unanswered question is whether any major producers are deliberately withholding supply (there's no evidence for that and I don't think it's likely, but it is a possibility).

Don't worry, weapons can get you a lot of oil -- certainly by trading them if not by using them...

[hogwyld]

5. Or those weapons could be used

to eliminate the competition (people in the developing world)for said resources, namely oil, so that we can maximize our god given right to drive Hummers that get 8 mpg.

[GliderGuider]

6. Taking out Chindia is a pretty ambitious idea.

I think you'd need more than smart bombs to do that. Maybe smart viruses? Of course you'd want a program like that to stay absolutely black...

[phantom power]

7. I know some people who will wet their pants upon seeing that site.

And because I'm a right bastard, I'm going to show it to them.

[hogwyld]

9. That's probably why the government

is so interested in completely mapping the human genome. That way they can isolate the brown person gene for a targeted attack. The only downside would be that we would have to mow our own lawns.:sarcasm:

[Dead_Parrot]

12. I really wish...

That that technology was beyond us, and that we weren't that petty.

Hey ho. Epic Fail...

[GliderGuider]

14. Epic fail indeed!

It's worse than that. If one government is working on such a diabolical weapon (lethal genetically targeted viruses), then it's a safe assumption that other governments would be working on it as well. The risks involved in not doing so and losing by default would be too extreme to permit a major nation to opt out. If one country's research effort succeeds, that government will know such a thing is possible, and will know that it's only a matter of time before some other (enemy) nation succeeds as well. Since the consequences of being attacked with such a weapon would be assumed to be utterly devastating, the implication is that the first nation to succeed will immediately use the weapon on the intended adversary (i.e. in a first strike with no warning).

This scenario is really too horrible for even me to think about very closely. All I can do is hope that no nation is working on such an effort. Unfortunately, given the consequences for any major genetically distinct nation that decides not to do it and risk losing by default, I can't imagine that such programs aren't under way -- certainly in the USA and China.

[judy]

10. Wow! That is so scary....

Well, to be honest, I am not sure I know the meaning of peak oil. In my mind I think "that's when there is no more oil". But I am not sure that's right.
Thanks for the link on the reasons why the barrel price is going up. I did study economics in my younger days, and I did learn about supply and demand.

However, where is the graph on the reasons why the Oil companies profits have soared to heights never known before in the history of mankind? I always thought that if raw materials prices went up and production goods went up, you had to raise your prices in order for the profit to remain the same. I did not think it would make your profits shoot up into the stratosphere.

Have we even asked the question?

[phantom power]

11. peak oil refers to the peak extraction rate...

that is to say, the point where we are pumping it out of the ground as fast as we're ever going to pump it. After the peak, there is of course still oil, but we can extract it at ever-decreasing rates.

I subscribe to the school of thought that believes we're sitting on top of the peak right now, and just starting to slide off the other side: in other words, from here on out our extraction rate will decrease.

[GliderGuider]

13. My understanding of the profit question is this

If you are selling the same amount of product and maintaining a constant percentage of profit margin, then as prices go up so will the profit in absolute dollar terms. Exxon is still selling the same amount of product and is raising their prices to maintain a 10% margin, so as gross sales revenue increases, so does the dollar value of their profit (10% of a climbing number grows as well). They're still only making 10% profit (compared to Micro$oft's 25% or so) but the total amount of their profit is increasing as their gross revenues climb.

[Terry in Austin]

15. Demand destruction, prices and profits

Good point about profit as a constant percentage. For one thing, it helps steer the focus away from the "profit-hungry oil companies" narrative, which I think is very necessary to do in order to get to any real understanding of what's going on.

I'll offer my take on it, for those who cling to this narrative:

It ignores the fact that oil producers just don't have the power to manipulate prices. Private companies control maybe 20% of the reserves; even OPEC, at about 40%, has long since lost the power to control prices.

It also ignores the market fundamentals at work. When supply falls short, demand must be reduced, so prices rise. In the case of a very inelastic commodity like oil, the price has to rise quite a lot to achieve any significant demand destruction.

Specifically, given the price elasticity for oil of about -.07, it means that the price has to rise 100% in order to reduce demand by a mere seven percent. That's a very steep increase, and that's what we're seeing -- that's what it takes to keep oil supply and demand in balance when there's a shortfall.

As you noted elsewhere, hot commodity trading and a weaker dollar do contribute to the price increase, but they are not the reason for it. The reason for it is just plain, non-conspiratorial, impersonal supply and demand at work. Maybe someday soon we can get used to the reality of oil decline and start dealing with it.

[phantom power]

2. I'm not sure it's the price, so much as it is the internalization that it's permanent.

So far, people haven't been real phazed by prices, and I think it's mostly that they've been thinking of it in terms of a weird transient thing that's going to go away. What we're seeing now is people starting to realize that this is the new normal.

[GliderGuider]

4. Good point. Once that meme starts to propagate the real fun will begin.

[bhikkhu]

8. NPR sure danced around the issue this morning

Low prices through the 80's and 90's discouraged discovery then, "we just need to get out there and find the oil", but the high price of rigs and shortages of labor now discourages discovery, nationalized oil powers won't let the independents in, speculation is fueling high prices...etc etc.

Just about every talking point was covered but what should be the core issue: that all the easy oil has been found, and we can't produce the hard to get stuff as fast anymore.