High Steel Prices: A Preview of Peak Oil

I use the phrase “Crunch Time” to denote the period after Peak Oil during which oil prices are so high due to production shortfalls that the normal functioning of economic activity is curtailed. Not only are the poor - and eventually the middle class - kept from buying the oil products they need, but industry’s capacity to ameliorate the problem by making what is needed to free society from the grip of oil is also greatly slowed, thereby extending the Crunch Time.

Such necessary products fall in two categories. First are those consumers can use to free themselves of oil: cars, trucks, and trains that operate on electricity instead of gasoline or diesel. Second is the capital equipment needed to make both such consumer items and to obtain more oil and other energy sources. Steel is one of the inputs to those products.

A hint of Crunch Time is in this report from Brazil and a sample is also described in today’s Wall Street Journal. The headline is, “Fast-Rising Steel Prices Set Back Big Projects.” The article starts, “Relentless increases in the price of steel are halting or slowing major construction projects world-wide and investments in shipbuilding and oil-and-gas exploration.”

Stripped of the human dimension the essential formula is:

global demand growth -> high oil, food and steel prices -> high costs to build rigs and ships -> higher energy prices -> higher oil, food and steel prices

This mechanical process of higher prices cycling up the line and shortages of things needed to make other things compounding the dysfunction is only the start. Then, the human dimension supercharges the process.

As the Journal points out, higher steel prices are now causing strikes in Turkey, cancellation of infrastructure projects in India, and government interventions in the private sector via price controls, nationalizations, and export controls - all of which cause other economic dislocations. Not the least of today’s dysfunctional outcomes is a slowdown now occurring in the production of equipment needed to find and produce oil.

As production slows, companies lay off workers. While layoffs tend to reduce ultimate consumer demand for products, in the short term shortages of manufacturing inputs just increase demand for those inputs further. Thus society’s initial efforts to increase manufacturing capacity turns into an effort to simply maintain capacity - or stop it from freezing up.

As the process of rising costs and slowing production reinforces itself, it gains speed like an ocean storm. As the Journal reports, “Last year, it took six months for steel prices to rise $100 a ton. Now, prices are moving that much in a month.”

The vicious cycle we are seeing today was initially caused by rapid growth and improved living standards in China, India and other poor countries as brought on by globalization. The process was initially demand driven. It can - and eventually it will - be corrected by a significant economic slowdown.

But the real Crunch Time will be caused by Peak Oil, the inability of the world to produce any greater flow of oil. What makes the real Crunch Time so vicious is that a simple recession will not cure the problem. It is likely that human inputs like violence and hoarding will only make the problem of insufficient oil even more acute. That is why today’s mini-Crunch is so tame compared with the Crunch Time that will occur after Peak Oil.

The scenario of shortages reducing society’s ability to function is why the Hirsch Report concluded that in order to have a fairly painless transition from petroleum-based transport to electricity-based transport, the world would need to start to make the transition about 20 years before Peak Oil started. Today, when we no longer have 20 years before Peak Oil, we are getting a small preview of the conditions to which the Hirsch Report was anticipating.

Here is a summary of the conclusions of Hirsch Report:

A scenario analysis was performed, based on crash program implementation worldwide – the fastest humanly possible. Three starting dates were considered:
1. When peaking occurs;
2. Ten years before peaking occurs; and
3. Twenty years before peaking.
The timing of oil peaking was left open because of the considerable differences of opinion among experts. Consideration of a number of implementation scenarios provided some fundamental insights, as follows:
• Waiting until world oil production peaks before taking crash program action leaves the world with a significant liquid fuel deficit for more than two decades.
• Initiating a mitigation crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would have peaked.
• Initiating a mitigation crash program 20 years before peaking offers the possibility of avoiding a world liquid fuels shortfall.”

Here are some excerpts from the WSJ article:

We have not yet seen that prices have peaked, what we have seen is the costs increasing every month,” said ArcelorMittal Chief Executive Lakshmi Mittal on a conference call with reporters.

While still in a position of pricing power, steelmakers are concerned that over time, their high prices will affect sales. “There will be impact on demand, and that is not a good development for the steel industry,” said Aditya Mittal, chief financial officer of ArcelorMittal, on a separate conference call.

As a result, steelmakers are taking steps to cut their costs. To shield themselves from higher raw-material prices, more of them are acquiring their own iron-ore and coal mines or deposits, as well as producers of scrap steel. Nippon Steel Corp. and other Japanese steelmakers announced this month that they would accelerate cost-cutting efforts, which could include layoffs and developing cheaper steel substitutes.

The industry is also consolidating, which should allow producers to become more efficient and gain economies of scale that could ultimately result in more pricing stability and fewer, larger players. In recent months, India’s Tata Steel Ltd. and Essar Steel Holdings Ltd. have made major acquisitions, as have Russia’s Evraz Group SA and Sweden’s SSAB Svenskt Stl AB (SSABF.PK). Even so, the world’s top-five steelmakers still account for just 18% of the world’s steel supplies.

Comments

[Ivan theCredible]

It's clear that we are heading towards an energy crisis. I hope the next president (whoever that ends up being) is thinking and talking about these issues and drawing up a plan behind the scenes, because he/she sure isn't doing that in public.

[JohnPseudonym]

Major construction projects canceled here... A new city hall worth $63,000,000 was canceled due to a 15% increase in the cost before the funding for the original $63,000,000 price was even approved.

At $73,000,000 and climbing, the taxpayers said no way!

[aquaculture]

Interesting article.
The U.S. geothermal industry experiences "dramatic growth search" with expectations that total power production (currently 3 million homes) could triple over the next few years.
GEA together with Ormat technologies (NYSE:ORA) and Glitnir Bank will host a workshop on july 23, 2008 in NYC to introduce geothermal energy to the NYC financial community.
Among the present: Google.
Google announced that geothermal energy will be one of their focus areas for new investments.
For more info: geo-energy.org

[phillips49]

Good article. Many years ago the Club of Rome published a book titled "The Limits to Growth" and the general message was that there is a limited supply of economically available necessary resources. It showed that population was growing exponentially and the demand for resources would grow along with population. After peaking, population would begin to decline as the standard of living declined.
Unfortunately, the USA, which has the most, will be among the first to experience the decline in the standard of living as high energy costs consume a greater portion of income. That will become more apparent the second half of this year. The USA reached peak oil a number of years ago and domestic production has fallen steadily. We are now dependant on foreign nations for a stratgic resource. A world power needs to be in control of it's strategic resources to control it's destiny.
We had a warning in the 70's with the oil embargo. Many of the young people today missed out on that. Too bad. Rationing, price controls, 4 hour gas lines, gas tank siphoning, and guns. We learned nothing. We did nothing. We fiddled while Rome burned all these years. Shame on us.
But we can still yet buy a little time. It will require compromise and ultimately change. Food for fuel will only exasperate the problem. Not only here but for other nations. We have coal, oil and natural gas that we can exploit if we untie our own hands. The time will come when the majority of people won't care about the pristine integrity of Anwar or the snail darter. They will just want affordable fuel and power. The hard choices have to be made now! The politically unpopular decisions have to be made now! In my view, it should be a national priority, a state of emergency if necessary. If we don't........we will be leaving our children the most miserable heritage we can imagine. Dollars channelled into energy will rob food, clothing, housing, health care, social services...all basic necessities.....everyt... to which we have become accustomed. As a nation, we will be at the mercy of other nations. They will exert their political will on us! We have imported our oil and exported our national wealth. There is still a little time and therefore still a little hope for our future generations.

[ardano]

dear phillips49...great post. what is so unfortunate that as boone pickens, of all people, says is that leadership on the energy issue has been lacking all those years. We're in Iraq because of oil. Who are we really kidding? Could we have tolerated yet another huge reserve of oil to fall into unfriendly hands? We will cut deals with the Saudi's and Russia to insure the flow of crude and natural gas. And, only because we are forced, will we change our ways domestically. However, we will find a way to get beyond this. In spite of how bad things look now, this country, this system, is the only economy and society who can take another energy shock and finally make the necessary changes. However, demand destruction in this case will not be easy.

[CLH]

What garbage this article is. This is from people who have NO understanding of capitalism. When prices go up people quit using the commodity and the price comes down. This is very simple but the people who are educated now have no understanding of simple comcepts. There is NO limites to growth but only limites in the intelligence of the left.

The limites of growth is BS written in the early seventies. It was shown 20 years ago to be untrue. Of course the socialists still beleive in their religion of too many people. Those countries still able to have babies will soon rule.

[bearfund]

Those countries still able (able? I think you mean greedy and stupid enough) to have babies had better put guns in their hands and send them off to die. There won't be anything to eat at home.

[Mukphly]

I have a small fabricating business, & the cost of steel is frustrating. I mean you work your ass off for 20 years building a quality product ( flatbed equipment trailers, utility trailers, & hydraulic dump trailers made from all steel) at a reasonable price, then wham, the material cost goes up 50% in under 60 days when people's & municipalities' budgets were already running on fumes. Because I own the building I work out of & now only have 1 employee, I can cut overhead to nil & ride this freaking thing out. But what of those who can not do this? ....It's looking ugly, but hopefully the elevator doesn't go clear to the basement before it turns around. Anyhow thanks for letting me vent & take care-Scott

[Alpha Seeker]

Now Jim, I am becoming a big fan of yours; we will share views and make money in these markets. For everyone else, another daily must, and Soros' favorite site is
wallastoninvestments.c.../

[cjwirth]

Kingsdale is right. As soon as global oil production starts to decline, probably this year, the price of oil will skyrocket and recession will not cause prices to drop. Oil is the base of manufacturing and transporting goods, including food. Global demand for oil is increasing at about 2 percent annually. Development in the Third World will use all of the all that is pumped. In a few years global oil production will decline at 4 percent or more annually. I disagree, however, that alternatives could have provided a system for transportation that could have saved us. Hirsch offers no evidence to support this contention. The 1977 National Academy of Sciences study on energy was stumped with this problem and there has never been a plan for how to develop such a transportation system. My research indicates that alternative energies will accelerate oil depletion and give us little that is useful in return (this report is free and will be updated by Monday): www.peakoilassociates....

[JimKingsdale]

CJ: I'm more optimistic on alternative transport because solar thermal, PV, wave and other renewable sources for electricity are fast becoming economic and practical. Link those to an electric vehicle and, boom, you get an alternative transport system. You probably are familiar with this model as promoted by A Better Place (www.projectbetterplace.../) and you probably know that both Israel and Denmark have adopted it as national policy. While those countries have certain advantages in implimenting it, eventually it can be used virtually everywhere I think. But it first takes the intelligence, determination, and expertise of a government to make it work. Jim

[j_remington]

Saudi Arabia is meeting ALL demands for oil.

``On May 10 we increased our response to our customers by 300,000 barrels because they asked for it,'' al-Naimi said later. ``So our production for June will be 9.45 million barrels per day. This is the request of about 50 customers worldwide.''

"The Saudi oil minister said Bush was satisfied ``because our response is positive. If you want to move more oil you need a buyer,'' al-Naimi said at a press conference at the Saudi foreign ministry in Riyadh."

"The Saudi supply increase will offset declines last month, MF Global's Laughlin said."

``This is good news for world oil markets and good news for President Bush, who appears to have used his personal relationship with King Abdullah to overcome Saudi reluctance to raise oil production and put downward pressure on world oil prices,'' said Jim Phillips, a Middle East analyst at the Heritage Foundation in Washington.

OPEC is smart. They do not want to curb economic growth. They want to maintain volumes of production to sustain it. It is within their control and best interest. Also, if they foresee the world economy declining (which is what is happening) they will surely sell as much oil as possible prior to the decline.

Oil prices are up because speculators like Goldman Sachs are manipulating the futures prices. Goldman Sachs' propaganda is fueling the speculation and investment hedging.

Also, oil futures trading is unregulated. Margin requirements are not stated nor enforced.

However the biggest picture is that the global recession is upon us and oil price and demand must decline.

Plus the US dollar is rising(interest rates will be hiked to curb inflation) would act to suppress the (dollar-denominated) price of oil.

The result will be lower priced oil in US dollars.

Read the latest excerpts regarding Exxon's shortfall in earnings. The larget Oil company in the world is

[ArtfulDodger]

I never dreamed there were so many leftists reading financial articles. The Dumborats that I know can't figure 10% of 100, much less understand financials.

Like Albert GaWhore's and Skinflinton's investments showed before they took office in 1992, leftists don't trust businesses and put their money as far away as they can from stocks.

The "Club of Rome"? Please! These crackpots have never made a right prediction. This group is an outgrowth of the Rockefeller's early 1950s invention that the planet had too many people on it and were about to soak all the resources from it and thus destroy the earth. Those beliefs were as far off base then as they are now.

Even though I am a long term optimist, I definitely believe that America's financial system will crash over the next few years. Oh, we'll most likely get through this one, but we're going to have to pay dearly in the short-term future with much higher interest rates due to an almost Author-Burns-like pumping of fiat money into the system to "save it."

Moreover, with our open border policies and promotion of unproductive races to the top of every part of our society, we are following the same devastating path as ancient Egypt, Troy, Assyria, Israel, Greece (both empires), the Etruscan State, Rome (both empires), Karthage, et al.

These formerly great nations all began as nationalistic Republics (ruled by static laws and natural born citizens of the same race) but eventually became Democracies (ruled by dynamic laws and imported races different from their founders).

Each one of these nations soon crashed from the weight of welcoming foreign races under a huge umbrella of social programs along with extending their armies to police other parts of the world.

America is now to a much greater degree than ever but has been since WWII comitting the same devastating acts as these ancient but now dead and mostly forgotten powers.

Watch our demise as we continue headlong down this path to mediocrity.

And yes, go ahead and hurt my feelings by calling me a racist; but history is before our eyes, and it is certainly not bunk in what we should learn from it --- but will not.

[barnburner]

Jim Kingsdale writes "But it first takes the intelligence, determination, and expertise of a government to make it work."
All the peak oil, alternative engergy information has been available to Congressional members as long as has been available to we the general public and have you seen or do you see any move in Congress toward an energy policy other than the invasion of Iraq and no-bid contracts for Halliburton? Do you hear the current crop of President wannabes saying anything intelligent about an energy policy-even an unintelligent policy? There will only be movement in Congress when their constituants can't put gas in their rig to get to work and are screaming bloody murder-might be sooner that we think!

[phillips49]

I think there was too much focus on the Club of Rome comment. So here are the points I was trying to make:

1. More people=more demand period. That's not right, left, capitalist, socialist, or liberal. That's just a fact Jack.
2. There are more people competing for the same stuff we need and that is just going to get worse not better. If we see the light at the end of the tunnel, more tunnel will be added.
3. Our transportation and energy system (the one we need to maintain our way of life) is fossil fuel based.
4. We are funding foreigh growth through our oil dollars.
5. We have resources that we can access and it is foolish not to use them.
6. Our national energy policy seems to be everyman for himself.
7. We are going to have to do better than that if we expect our children to have what we have.
8. In the mean time follow the money for your investments!

[jonreagan]

A previous post emphasized that finding our way out of this mess will take "compromise"... He's right, but I'd add the word "sacrifice" as well.

Jimmy Carter was ridiculed in February of 1977 when he made the "cardigan sweater" speech, attempting to pave the way for a national energy policy. While I disagreed with many of his proposals, it was an effort to begin a dialogue; good luck! The following week, Democratic Senate Leader Robert Byrd (king coal!) dryly remarked that the new President's proposals would be taken up sometime "in a year or so". So much for trying to be proactive on major issues. This is a reactive country, which waits for "crunch time" before taking serious action.

I'm a "recovering Democrat", exiled from the party because I believe in free trade and agressive exploration for new sources of energy. My former colleagues have a problem with just about every energy source available: nuclear, coal, oil...some of them even hate natural gas! These people don't want to hear about "compromise"... They are the "rule or ruin" segment of American politics.

At the same time, my new "right-of-center&... friends don't want to hear about "sacrifice". I think blowhards on Capitol Hill look ridiculous complaining about Rex Tillerson's salary...but I DO wish there would be an honest debate about raising fuel efficiency standards. But that would be difficult, and this country is more into lazy, headline-grabbing solutions than they are doing anything which might be considered "hard".

Jeff Mackey of CNBC's "Fast Money" nailed it earlier this week, in cautioning against rushing head-long into solar stocks. They move up rapidly in tandem with increases in the price of crude, but as Mackey put it, "as soon as the price of oil recedes even a little bit, everyone in this country will go back to buying their Hummers, and solar will go to the back burner again!" Unfortunately, I think he's right on.

After a bridge collapses, you hear talk for a couple of weeks about the USA becoming the "infrastructure country".....when a big story breaks about pitiful SAT test scores, there's buzz about us becoming the "education country". But again, we're essentially a country with a short attention span, that reacts to major crises, and then forgets about them two weeks later.

And don't count on any leadership from our politicians, either. I hear lots of grousing about rising grain prices, and food riots in the rest of the world. And then they proceed to pass a farm bill with an insane ethanol policy--a grab bag of "goodies" to the big Agriculture companies.

Unfortunately, the author's rather bleak forecast is right on the money.

[pockyclips2020]

One of the better articles of late on Alpha. Even if we started a "Manhattan Project" on energy today, we still will not avoid a drastic shift away from crude that awaits us by the middle of the next decade.

We will not be able to afford crude, economically or geo-politically.
The handwriting has been on the walls for 35 years. The New World order has us by the short hairs!

[phlash79]

Carbon based fuels have a limited lifetime...the beginning of the end was the first day we started using them...the continuing folly is to argue the point...we live in an eco system that we impact significantly and no matter what we do...we are going to impact that system...the trick is find balance and avoid tipping points...electricity offers the best alternative to petroleum for transportation...Thori... powered nuclear power generation offers a solution for the future...the Indians and Russians are pursuing this as we speak...there is a tremendous amount of thorium found in nature...it offers more energy per kilogram than anything else currently known...it requires plutonium for a trigger which is why the Russians want to utilize the technology to obliterate their weapons grade fuel...why because it leaves none behind...which would solve the issues facing us from terrorist states like Iran, Korea and others that need power...political reasons are another whole discussion...half life of the material is measured in 100's of years instead of 1000's....fuel will last 7 years requiring a lot less maintenance...all of the other forms of renewable energy will provide stopgaps and alternatives but "those who have cheap and available energy will grow more stable and will be the leaders in the future...this should be the US"...

As usual Education is the key...and this site tries to accomplish that by presenting the facts...blaming politicians is a waste of time...they spend their entire lives acheiving compromise...a crisis creates change...and a crisis is approaching...

[phlash79]

two additional points...addressing the timing of solutions...electric cars like Israel is setting up ...is only a degree of scale in difference to mandating that we move to digital TV and subsidizing the set top converters...if we want to move to electric vehicles I am sure we can find motivations to accelerate the process...

The two points on Thorium...the plants can be be built in a fraction of the time and at a fraction of the cost...And for the fearmongers the units can be built with a failstop similar to the freeze plugs in your car/truck engine that shuts down the reaction and stores the reactive material...no nuclear accidents that current nuclear technologies suffer from...

[ArtfulDodger]

"New World Order." Following Jimmy Carter's advice! The world is running out of oil and other resources. A population explosion!

These children must not have been alive in the 1970s when these shams were run on us.

There is enough oil to run the world just as we're running it for another 150 years, and there's enough coal to run it for twice that long.

If someone hasn't come up with a better form of energy by then, those living at that time can simply go back to the horse and buggy.

China and India are using only a small amount more today than they were five years ago. Granted, China is buying a lot of hard metals, but they'll over supply themselves before long, and prices will crash.

The jack up in commodities began when the Bush Administration began beating the war drums to attack Iraq.

Since that time oil and all other hard commodities have become the main vein of the Momentum Investing crowd. Wherever there's an ounce of money there they show up and their cohorts on the "business" shows begin pumping those sectors. Don't fall for it!

These players can keep markets irrational much longer than anytime in the past, and that's what we have today. But when they pull out, prices crash much, much faster than they rise.

When they finally move to other areas, all of a sudden the world will be flush with oil and all hard commodities. It's happened before and it's going to happen again.

People listening to this "peak oil" nonsense will get murdered, just as those who listened to the dotbomb promoters who got on TV and pumped companies that had no money and no earnings and no business plan got killed.

I figure about sometime mid-summer or perhaps even sooner we'll see the commodity play bust out.

Those of you falling for this trite better have your money elsewhere unless you want to end up like the millions who thought the Internet and anything connected with it was the end all to making money.

Invest in sectors that these con artists are not in, and you'll be better off.

Rebeldog

See here for the latest US Geological Surrvey on the huge oil reserves in the Bakken: www.energyandcapital.c...

See also "What Energy Crisis?" by Daniel Yergin

See also "The Deep Hot Biosphere: The Myth of Fossil Fuels," by Dr. Thomas Gold

See coal reserves here: www.xist.org/charts/en...

(The best estimates I can find about coal is that the US alone has enough in-ground to last at least three-hundred years burning at the rate we’re burning it today. Lasting even longer will be no problem because we’re inventing more efficient ways to use coal every year. Once a very dirty source of energy, we’re now burning it cleaner than ever.

With technological discoveries taking place nearly every day, the trend for carrying us into more efficient and even cleaner coal usage will continue—barring government intervention. But that’s the problem. Natural gas and nuclear power concerns have the money and the lobbying power at this point. On top of that, leftist “environmentalists” have blackened coal as an energy source in the world’s eyes. So instead of turning toward our greatest natural energy resource, we’re moving away from it. Could nation-building also add to the reason we’re not using our coal and buying energy from other countries?
Jimmy Carterites show love buying from poor nations to build them up and sneakily transfer America's wealth abroad.
Rebeldog)

[xander]

the bottom line is this-the price of oil has doubled since the dems took over congress 16 months ago. they must be doing something wrong.

[catweazle]

Hi Americans,

it was nice to see you at the top of the World for some years!
Now the basic of your economic and financial wealth runs dry,
and all your dreams, suburbs, cars ... are getting useless.
I hope you had a nice time by wasting the Energy, made by Nature in Millions of years, in just two generations.
Please do the rest of the World a last favor and make a peacefully decline without using you WMD's.(you can use them more meaningfull for making the last hamburges )
Thanks a lot!

[BrianPursley]

Petroleum is infinite and renewable. Hydrogen is the most common element in the universe and carbon is the fourth most common element in the universe.

We should immediately begin drilling offshore in California, Florida, the East Coast of the United States, Alaska, ANWR, and the National Petroleum Reserve.

oilismastery.blogspot..../

[phillips49]

Dear Catweazel,

Your obituary is a wee bit premature. You seriously underestimate us Americans. We whine, moan, groan, and complain in an open, free, public forum. But we'll get'er done son. We'll be the last ones standing and we won't need WMD's.