lewisabroad

When Will the Oil Price Pop?

oil prices will continue to behave with exteme volatility - that is the only sure thing. Extremely high prices hit the real economy of import nations and result in economic downturn. Demand reduction from the resulting downturn = lower prices. price rebound will be huge in a recovery and has the potential to derail a recovery, setting the stage for another drop in price.
Long term the analysis is correct. However, when the price of oil reaches parity+switching cost of alternatives it will plateau at a new equilibrium point. By alternatives I mean grid-connected battery powered + nat gas. Until then it will be simple supply demand. Trying to put a number to it is a fool's errand, because nobody knows where the dollar will head in three years. When I say price, I am talking oil's equivalent to a basket of currencies (or relative to a basket of commodities if currencies globally are devalued).
The alternative scenario to switching to oil-free transportation is grim. this could be the case if switching costs are too high for a cash-strapped economy. The US is certainly in a dire situation. Hopefully the pain will give people the necessay motivation to work hard as nobody has really done in the last 80 years.

Peak Oil's Bell Is Ringing

The author first describes a need for demand reduction and switching to localized production as a solution, and then describes a free market solution. Does he propose a free market solution as a way to implement the switch?S
Switching to localized production requires that once-outsourced manufacturing now needs to be done locally and manufacturing that was once done for a global market is now done for a local one. Businesses that were once profitable because of economies of scale and scope are no longer so, resulting in overall global economic loss. Producers for a local market are rarely able to achieve the efficiencies of a global producer, the result will be an overall increase in the cost of goods or decrease in quality, or both.

We experienced "peak oil" over the summer: a period when demand for a product with a highly inelastic price nearly exceeded supply. It's a good starting point to see if free markets will provide the necessary structure to prevent peak oil from affecting quality of life.

Over the summer price was also affected by hedge funds and other financial players speculating on the market. Prices plateued a bit when China and India decreased subsidies and then collapsed when speculators had to cover losses on unwinding positions when the commercial paper market collapsed. The speculative positions taken by non-market players may have caused prices to fluctuate more than they might have in a pure supply-demand market. My feeling is that the speculator's role may be overplayed however, as we saw a similar price spike in the 1970's when there were few players outside the market.

The idea that the market will solve this problem is a good one. As the margin between supply and demand grows thin prices rise. People then switch to other modes of transport or use other fuels, the price declines, and then people (perhaps) switch back, until a kind of equilibrium is reached.

There are a couple of problems with the free market model, however, that argue against a pure market solution. First, switching costs can be high, incur an initial investment cost, and take time. For example, switching to public transport from a car incurs a time cost of the customer and long-term will overload the public transit system resulting in a need for infrastructure investment. Switching to PHEVs requires a huge retooling investment from auto manufacturers and also requires time.

Second, because fuel prices are reflected in almost every product and service, fluctuation in fuel prices does not just affect the amount of driving we do but also the quantity and types of products we buy, resulting in a ripple effect across the entire economy. Price spikes in oil accompany periods of global economic growth, price collapses accompany periods of global recession.

Third, market policies are not determined globally; some countries implement subsidies while others allow market forces to rule. Subsidies distort the ability of supply signals to be sent to customers and modulate demand.

Lastly, since the price of oil is inelastic, prices fluctuate far out of proportion to the number fo marginal barrels of production out there. This results in dramatic price swings (both up and down) depending on the availability of oil. A drop in demand of less than 2% has led to oil prices dropping by roughly 50%.

We need policies that not only help us reduce demand, but also help dampen price spikes and troughs. It is nearly impossible to expect the market to be able to create technological solutions to high oil prices over the course of eight months. What happens instead is that demand for other goods and services is curtailed to free up consumers cash to fill up a tank, until consumer demand drops cause a recession.

In the case of petroleum, the answer is not "prices allocate their best use". the answer is "prices cause global economic instability and prevent long-term investment and decision-making" - at least on the part of consumers and producers.

My argument is that the only solution is to move away from oil to a diversified energy portfolio. Policies should be geared towards promoting electricity for transportation, whether through EVs or public transit, since electricity represents a diversified energy source. Let the utilities then decide which source is most efficient for them. If climate change is a concern, a general carbon tax would tilt economics in the favor of renewables and biofuels.

Crude Sell-off: Solid Entry Point into U.S. Oil Majors

oil demand is highly ineslastic - that's why it took a doubling in price to cause a 3% reduction in demand in the US. Oil is worth whatever people will pay for it - where jjason $60 comes from is beyond me. It costs ~$3 a barrel to extract oil in Saudi Arabia or Iraq, $40+ to extract it from Athabasca tar sands. add in transportation and delivery probably jjason is right, but it is willingness to pay that sets the price - not production and delivery costs. Clearly a fraction of drivers in the US are not coping well with $4 a gallon hence the drop in demand and price. Combine that with a reduction in Chinese subsidies and you have demand destruction causing a slight excess in supply that results in a radical drop in price. That's how inelastic goods' prices behave in a market. The true speculators in this market are all those American drivers willing to pay $4 a gallon - not traders on wall street. Complain about the price, but until you trade in your f150 or H2 for a prius you aren't sending a signal to the market that the price is too high.
One way we get $60 a barrel oil is with price caps. Do you remember last time we did that? lines at gas stations? theother way is demand destruction on a much bigger scale than currently. remember the late '90's when gas got so cheap? This was due to heavy demand destruciton in asia due to the asian financial crisis combined witha bunch of new investments coming on line from 10 years prior.

Michael is right on the money with this one. A host of fundamentals points to a long term price rise in oil. Until several of the fundamentals in demand change (US energy policy and foreign subsidies being 2 big ones) there won't be any structural change. What we are seeing is the radical effect that a few percentage points demand reduction globally is causing on oil prices. The only thing anyone could accurately predict in this kind of market is volatility. The hardest part is going to be finding the lows. Long-term, the price is going to go up, but there are going to be a lot of retrenchments and bumps in the road as demand fluctuates. Production is pretty well tapped out globally - anyone who tells you that we haven't hit peak oil from a production standpoint is not looking at production data.
As for US energy policy, the only bit that is going to make a difference to the typical American as well as the balance sheet is programs that help with demand destruciton. That means increases to CAFE, tax breaks on plug-in hybrids and alt-fuel vehicles like those running on nat gas, and a gradually increasing tax on oil imports to fund those programs. The tax revenue would go directly to programs designed to reduce demand by small business owners and homeowners, like rebates for PHEV and replacement of oil -burning furnaces with efficient gas / heat pump / solar thermal systems. Any excess would be nice to bring down the defecit - another big drag on our economy paying interest to Japanese and Chinese treasury holders.

Offshore drilling would also help, but is a longer-term solution versus demand reduction schemes and delays the inevitable point at which we wean transport from gasoline.

Long-term, the best investment play is hold what you've got in this sector. Short term, we won't know if this is a bottom until we see how much demand has been affected by the decrease in price - some time in September. I expect prices to slide until we see an uptick in US demand or reduction of inventory.

1,238 Billion Barrels of Oil Reserves: Is This an Oil Price Bubble?

Paulk, is opening up remaining US reserves our best option?
1. It won't have any affect on global supply for 7-10 years.
2. I won't lower prices in the US unless global demand goes up less than the incremental increase in production those fields provide. The only affect domestic production has is on the trade balance and some local employment. Great benefits, I admit, but I think far more jobs could be created by developing a technology-driven alternative fuels / alternative technology economy and exporting. Chevy Volt, PV research, and cellulosic biofuels research are a few examples. If we are successful with these then nobody would be buying the oil from the Sauds, Iran, or Chavez, they would be buying or licensing tech from US firms.
3. In 30-50 years, when foreign reserves are tapped, won't our children and grandchildren be glad there is still some production capacity in the US? Might it be a more valuable strategic commodity when it is left in the ground for use in the future when it is more scarce? I suppose this may be one reason the Sauds are reluctant to increase production - the other being maybe they can't...
4. www.eia.doe.gov/oiaf/s... says it all: "With respect to the world oil price impact, projected ANWR oil production constitutes between 0.4 and 1.2 percent of total world oil consumption in 2030, based on the low and high resource cases, respectively. Consequently, ANWR oil production is not projected to have a large impact on world oil prices."

Jacktrader - if you read this, could you elaborate? I'd love to hear more detail about how the estimates are calc'd

Last point, $4 a gallon for gas is still cheap folks - Europeans, Japanese have been paying more for over a decade. And before we go pointing fingers at the Chinese and Indians their per capita oil use is 1/12th and 1/34th of the US, respectively.

1,238 Billion Barrels of Oil Reserves: Is This an Oil Price Bubble?

Why all the irrational vitriol directed at "greens"? I don't get it, why a group of people who advocate risk management when it comes to climate change get so much hatred directed at them for curtailing 'freedoms'. I'd say the patriot act did just as good a job and it was a bipartisan effort. Besides, what is wrong about ending our dependence on fossil fuels? something wrong with evolution? Nuff said.
About the supply demand problem, three factors we have to think about:
- rate at which oil can be pumped from the ground is finite. Even the biggest reserves take time to extract, and the faster you try to extract them the faster the geological formations will "break", resulting in oil that cannot be recovered (see recent mexican production). We can pump oil for 1000 years - just not very much by then.
- new discoveries typically take 7-10 years to come online, longer for remote projects (I worked for a supplier to Sakhalin I and II - these places are a logistical nightmare)
- high inflation in oil producing countries means it is in their interest to see high prices. They need to maintain their social welfare systems and the only way to do it in an inflationary economy is by restricting supplies.
Dr. Perry may be right about reserves, but how much is in the ground doesn't set the price - it's how fast we pump it minus how fast we burn it (plus some manipulation by the hedgies). Right now that is almost at parity and until demand goes down it won't change. I'm willing to bet that if prices do start to drop below $100/barrel OPEC will reduce production. I'm also willing to bet that we will see nothing but a super volatile market for at least the rest of the summer, which will vindicate the bears when it drops and the bulls when it skyrockets. All the while the hedgies will be playing off each other to see who has the fastest algorithm on the trading floor...
High oil prices are the best thing for this country. Nothing spurs innovation better than a hungry belly, and Americans have been too fat too long.