Oil Prices and Global Exports

[GratefulCitizen]

Gasoline prices in the USA have been a prime driver for the oil market for a long time.
The historical prices reflect a natural business cycle.

In 1996-1997, there was some artificial increase in the market supply of oil due to the SPR dump.
This dump, and subsequent refilling, could well have contributed to increased amplitude in the current cycle.
The increase in liquidity to consumers from cheap credit, recent tax policies, and the stimulus package may have extended the recent price climb.

New markets in emerging economies probably reduced overall demand elasticity.
The economy in the USA is less-oil dependent now than in the past. This reduces comparative demand elasticity.

Interference by various governments may have slowed supply response.
(regulation, nationalization of private industry, instability)
Lastly, speculation has probably further extended the climb.

The tech bubble popped.
The housing bubble popped.
This climb won't go on forever.

Historical gas prices and their deviation from the average:

* Price is in year 2000 chained dollars per gallon
**Standard deviations away from 1949-2007 yearly average (~$1.51)
***Price shifted from leaded regular to unleaded regular

Year ---- Price* --- Deviation**
1949 ---- $1.64 ---- 0.60
1950 ---- $1.62 ---- 0.51
1951 ---- $1.54 ---- 0.12
1952 ---- $1.52 ---- 0.02
1953 ---- $1.57 ---- 0.27
1954 ---- $1.58 ---- 0.31
1955 ---- $1.55 ---- 0.17
1956 ---- $1.54 ---- 0.12
1957 ---- $1.55 ---- 0.17
1958 ---- $1.48 ---- (0.17)
1959 ---- $1.47 ---- (0.22)
1960 ---- $1.48 ---- (0.17)
1961 ---- $1.45 ---- (0.32)
1962 ---- $1.42 ---- (0.46)
1963 ---- $1.40 ---- (0.56)
1964 ---- $1.37 ---- (0.70)
1965 ---- $1.39 ---- (0.61)
1966 ---- $1.39 ---- (0.61)
1967 ---- $1.39 ---- (0.61)
1968 ---- $1.35 ---- (0.80)
1969 ---- $1.33 ---- (0.90)
1970 ---- $1.30 ---- (1.04)
1971 ---- $1.26 ---- (1.24)
1972 ---- $1.20 ---- (1.53)
1973 ---- $1.22 ---- (1.43)
1974 ---- $1.53 ---- 0.07
1975 ---- $1.49 ---- (0.12)
1976 *** $1.53 ---- 0.07
1977 ---- $1.53 ---- 0.07
1978 ---- $1.46 ---- (0.27)
1979 ---- $1.82 ---- 1.48
1980 ---- $2.30 ---- 3.80
1981 ---- $2.33 ---- 3.95
1982 ---- $2.07 ---- 2.69
1983 ---- $1.90 ---- 1.86
1984 ---- $1.79 ---- 1.33
1985 ---- $1.72 ---- 0.99
1986 ---- $1.30 ---- (1.04)
1987 ---- $1.30 ---- (1.04)
1988 ---- $1.25 ---- (1.28)
1989 ---- $1.30 ---- (1.04)
1990 ---- $1.43 ---- (0.41)
1991 ---- $1.35 ---- (0.80)
1992 ---- $1.31 ---- (0.99)
1993 ---- $1.25 ---- (1.28)
1994 ---- $1.23 ---- (1.38)
1995 ---- $1.25 ---- (1.28)
1996 ---- $1.31 ---- (0.99)
1997 ---- $1.29 ---- (1.09)
1998 ---- $1.10 ---- (2.01)
1999 ---- $1.19 ---- (1.57)
2000 ---- $1.51 ---- (0.02)
2001 ---- $1.43 ---- (0.41)
2002 ---- $1.30 ---- (1.04)
2003 ---- $1.50 ---- (0.07)
2004 ---- $1.72 ---- 0.99
2005 ---- $2.03 ---- 2.49
2006 ---- $2.22 ---- 3.41
2007 ---- $2.34 ---- 3.99

Sources:
http://www.eia.doe.gov/emeu/aer/txt/ptb0524.html
http://tonto.eia.doe.gov/dnav/pet/hist/wcsstus1w.htm

[nmap]

Thanks for the numbers, GratefulCitizen!

I think these represent an opportunity to evaluate our two theories...although it may take several years to get a clear answer.

If the deviation remains high, or becomes higher, over time, peak oil would tend to be validated.

If, however, the standard deviation returns to a smaller level, your theory of a bubble would be strengthened.

The period from 1980 to 1982 (three years) seems to represent a previous high. We already have three years again (2005-2007). So if we get a fourth year in 2008, the scales should start tipping my way. And if it extends to 2009, I think you'll want to reconsider some of your assumptions.

[Team Sergeant]

IMO Peak oil is not the only concern; the growing demand for oil in India and China and other developing nations is causing the demand to outstrip the current supply.

Americans don’t realize we’ve had it easy for the last century; we were the biggest consumers of oil, now we have to learn to share. India and China together are about six times more populous than the United States; just wait until each person in both those countries has two SUV’s, an ATV, a boat, a jet-ski, a private jet etc etc etc.

Our time of living large is coming to an end and we are about to learn what it is to live in a "global" economy. The days of "biggie size" will soon be history so will restaurants serving an individual meal large enough to feed six.

After reading what the auto industry and airline industry is currently doing in light of the rising fuel costs I’d say that this current price hikes are here to stay.

Those that think the oil companies are spending billions in alternative fuel research I've got a bridge in Manhattan I’d like to sell you….. Those companies are looking for ways to find new oil and squeeze oil from shale; none are investing renewable alternative fuel.

I find it amusing that the average American thinks big oil companies will rescue them, they will only if they can make billions in return and a renewable alternative fuel is not going to make them billions a year.

Personally I’d like to see the Department of Homeland Security and a few other federal agencies sent the way of the dodo and use their funds for a Department of Alternative Fuel Research.

Team Sergeant

[Ret10Echo]

http://www.nrel.gov

[Team Sergeant]

Originally Posted by Ret10Echo

http://www.nrel.gov

I'd like to see their operating budget compared to "Homeland Security"

I'd also like to see the salaries of the scientists working there.

IMO we're not going to see real progress until we put real money into the process.

[Ret10Echo]

Originally Posted by Team Sergeant

I'd like to see their operating budget compared to "Homeland Security"

I'd also like to see the salaries of the scientists working there.

IMO we're not going to see real progress until we put real money into the process.

Miniscule in comparison. I deal with some of the smart-folks there...they do some amazing work, but they do research, not production. Unless corporate America picks up where the NREL ends, there will not be a "product" so-to-speak...

My opinion...

and besides, not a lot of social-welfare recipients working there or Sandia Labs.

[azmg]

It' a rare occurrence that innovation and technology flourish under the stagnation of a bureaucracy. They often seem to come out of garages, on the backs of napkins and in dorm rooms

In support of Ret10Echo I have seen some recent strides in the efficiency of solar cells and a serious ramping of this technology in the private sector. While only one example, and mostly a commercial application it shows that advancement still works best in an entrepreneurial environment. Having played the game in a past life I can assure you that the private sector won't turn away grant money once you close down some of those non-essential government agencies and that the resulting competition has the potential to rapidly bring about solutions to at least some of these problems!

How do you all feel about the viability of hydrogen power for our cars, trucks etc.? Based on the success that BMW and Honda have shown it would be nice to see what the masses think. I realize that it is, for the time being a somewhat cost prohibitive option for most but as with most things mass production (and acceptance) brings a much lower cost. I am also aware that the main issue outside of the initial cost is "refueling" and the lack of "stations" but if the viability is there these things will come.

[Ret10Echo]

Originally Posted by azmg

It' a rare occurrence that innovation and technology flourish under the stagnation of a bureaucracy. They often seem to come out of garages, on the backs of napkins and in dorm rooms

In support of Ret10Echo I have seen some recent strides in the efficiency of solar cells and a serious ramping of this technology in the private sector. While only one example, and mostly a commercial application it shows that advancement still works best in an entrepreneurial environment. Having played the game in a past life I can assure you that the private sector won't turn away grant money once you close down some of those non-essential government agencies and that the resulting competition has the potential to rapidly bring about solutions to at least some of these problems!

How do you all feel about the viability of hydrogen power for our cars, trucks etc.? Based on the success that BMW and Honda have shown it would be nice to see what the masses think. I realize that it is, for the time being a somewhat cost prohibitive option for most but as with most things mass production (and acceptance) brings a much lower cost. I am also aware that the main issue outside of the initial cost is "refueling" and the lack of "stations" but if the viability is there these things will come.

My take:
Hydrogen production is the greatest hurdle to overcome. If you use more energy than you produce (ala ethanol) then it is counter-productive. Solar Gensets and cracking stations have potential, but from what source the hydrogen is produced is the question....there are those here much better prepared to discuss those options than I....

R10

[frostfire]

Michael Masters testimony before the Committee on Homeland Security and Governmental Affairs
May 20, 2008

http://hsgac.senate.gov/public/_files/052008Masters.pdf

[GratefulCitizen]

Originally Posted by Team Sergeant

Personally I’d like to see the Department of Homeland Security and a few other federal agencies sent the way of the dodo and use their funds for a Department of Alternative Fuel Research.

Team Sergeant

The USAF is already helping to push an economy-of-scale in one important area:
http://www.hawaiireporter.com/story....f-03aa915bbfa1

The technology is already there:
http://www.futurecoalfuels.org/technology.asp

Once the economics reach a tipping point, it can take over.

In the early 80's, oil shale was ramping up in western Colorado.
Shortly before the infrastructure was in place, the price of oil dropped, and oil shale was no longer economically viable.

Another price drop may well doom/delay some current alternatives.

[nmap]

Coal to liquids may not be a viable solution. Just like oil, people tend to extract the part which is easiest to obtain, highest in quality, and cheapest. Coal usage is already high and generates approximately 50% of the electric power in the United States. As an interim (stopgap) measure, the approach may be necessary. However, as a general approach there is substantial risk of sinking considerable investment in infrastructure which will be rendered useless by reductions in supply.

There are some indications that peak coal will occur about 2050. That's only 42 years from now; which means we would have to scale up production leaving a relatively short amount of time before coal encounters the same problems faced by oil today. This does not address the issue of how a significant portion of the United States electrical power will be generated after peak coal.

The children of today seem likely to live in interesting times.

[GratefulCitizen]

It's a heavy read, but still an excellent lecture on the resource debate:

http://www.mines.edu/Fac_staff/senat...ilton_text.pdf

The author:
http://www.mines.edu/academic/econbu...ty/tilton.html

[nmap]

The paper is interesting, and well worth reading. It points out some useful concepts. The point raised in the abstract, “The optimists cannot prove the pessimists wrong, nor can the pessimists prove the optimists wrong” is an important point. At this point, both the optimistic and pessimistic views cannot be proved. However, in most areas of life we must make a variety of decisions based on inadequate and sometimes conflicting data. It is my contention that this applies to us and our individual lives, and to our nation in terms of the geopolitical strategies that must be pursued. From the perspective of potential military involvement, it may be prudent to at least consider the implications of the pessimistic case.

Let us consider page 4, paragraph 1. “This, for example, is the view of depletion found in Limits to Growth. Depletion is like a pair of mice eating away at a big piece of cheese. One day the mice (or their many descendents) are fat and happy, the next the cheese is gone, the cupboard is bare, and starvation looms.” This model is woefully inadequate with regard to discussions of oil depletion. We will not run out of oil in a hundred years, nor a thousand years, nor even in 10,000 years. What will happen is that the rate of flow will decline; and therein lies the potential problem.

In paragraph 3, also on page 4, we notice “Coal, natural gas, petroleum, nuclear, hydropower, wind, and solar energy can all be used to generate electric power. The mix of resources used at any particularly time reflects their costs. If depletion drives the costs of some energy sources up, society will reduce their use and rely more on alternative energy sources.” Which is generally true, although one might quibble that mere electrical power will not fuel trucks or cars as efficiently as liquid fuels do. Notice the key point within the quotation; when costs go up, disruptive effects may occur. The magnitude and the rate of price increases form the heart of concerns with regards to peak oil.

On page 5, paragraph 1, we see “but economic depletion, where the costs of producing and using mineral commodities rises to the point where they are no longer affordable.” It is not unreasonable for Dr. Tilton see the problem from the perspective of an economist; however, it is worthy of consideration that the extraction of energy must also account for the energy invested in the process of extraction. At inception, it cost the energy equivalent of about one barrel of oil to extract 100 barrels of oil. As the number declines, one gains less net energy from the process. Should that energy return become a negative, there is no net gain of energy. Thus, we need to consider not only the economics but also the energy balance in the process.

In paragraph 3 on page 5, Dr. Tilton points out that depletion will not be a surprise, and I agree wholeheartedly. My contention is that we are seeing the beginning of depletion effects in the oil markets. We should not be surprised as the process continues over years and decades, unless we choose to ignore the evidence. Notice that the problem is only partially one of oil depletion; a much greater problem is the human factor. If the entire population of the US met the standards of the Quiet Professionals, the various challenges of peak oil could almost be dismissed. However, the demographic realities are such that people will probably behave badly, and necessary planning and mitigation will not be pursued.

Again on page 7, paragraph 1, Dr. Tilton states “With the fixed stock paradigm, physical depletion is inevitable. It will come suddenly, and likely take us by surprise.” I could not disagree more strongly. Depletion will not come suddenly, and will only take us by surprise if we are steadfast in our refusal to look at the evidence.

On page 10, paragraph 3, is a nice statement of the optimistic case. “They stress the robustness of the marketplace. Any tendency for depletion to drive the price of a mineral commodity up unleashes a number of powerful forces that mitigate any tendency toward growing scarcity. Higher prices encourage exploration for new deposits, the development of new sources of supply, substitution toward more abundant resources, greater recycling, and conservation. More importantly, higher prices increase the expected returns to new technologies that reduce production costs, perhaps by exploiting completely new sources of supply, and to new technologies that reduce consumption.” Certainly, it cannot be discounted. That said, depending on hypothetical new technological creations seems imprudent. It is certainly reasonable to hope that such things occur, but quite another to base one's planning on such an indeterminate possibility. It seems akin to assuming that one will win the lottery. Still, it all comes down to what probability one assigns to the likelihood that someone, somewhere will create a new solution.

On page 11, paragraph 2, Dr. Tilton comments “Whether the optimists or pessimists are right will likely depend on the shape of the cumulative supply curve.” And I agree completely. This is one potential problem with the oil supply. New technology has, among other things, increased the rate of flow from oil fields. This means that when the fields start to deplete, they generally do so rapidly. We don't know what the condition of the fields in Saudi Arabia might be; however, we do know that they are old fields and that there are growing technological challenges with them. This is derived from Simmons text, Twilight in the Desert. Should the fields in Saudi Arabia depleted a rapid rate, there is a significant possibility of global economic dislocations. However, the shape of the curve is indeterminate.

Dr. Tilton's discussion of environmental and social costs are interesting. That said, I think we can discount both environmental and social costs in our examination of peak oil. If people are cold and hungry they will not be concerned about the rain forests, endangered species, or isolated groups of indigenous people. Whether that is right or wrong is way above my pay grade. I am convinced that the law of necessity will overrule all other considerations.

On page 18, paragraph 2, Dr. Tilton says “Conversely, if segments of the curve turn dramatically upward or incur discontinuities, future trends in resource availability could prove quite troubling.” And I agree completely. He goes on to say “Claims that mineral depletion unquestionably does, or does not, pose a serious threat to the welfare of modern civilization should be treated with some skepticism.”, and that is completely true. Predictions based on limited, ambiguous, and contradictory data deserve scrutiny and caution.

In the concluding paragraph on page 20, Dr. Tilton says “And so it is with our fears of mineral depletion. Over the next 50 to 100 years, . . .
mineral depletion is not likely to rank among the most pressing problems confronting society. The great beyond, however, depends on the race between the cost-increasing effects of depletion and the cost-reducing effects of new technology. The outcome will be influenced by many factors, and is simply unknown.” He's right. We can also say with certainty that it is impossible to protect if a hurricane is going to hit a specific town on a specific day. But if I lived in a coastal town, I think I would still want to address preparedness.

So, according to this paper, it looks as if we are nearly on the same side.

[GratefulCitizen]

Page 6, paragraph 2: "...population growth no longer necessarily undermines the long-run availability of mineral commodities. Every new baby is born with a brain as well as a mouth."

Herein lies my apprehension about the future of energy/oil for this nation -- the "brain drain".

Universities aren't cranking out very many graduates in the fields of mineral economics or petroleum engineering.

Many of these graduates are either foreigners or will be employed by foreign companies/governments.

We need appropriately skilled/educated people solving the USA's energy problems (as opposed to politicians actively or passively worsening the problem).

[nmap]

Originally Posted by Team Sergeant

IMO Peak oil is not the only concern; the growing demand for oil in India and China and other developing nations is causing the demand to outstrip the current supply.

Americans don’t realize we’ve had it easy for the last century; we were the biggest consumers of oil, now we have to learn to share. India and China together are about six times more populous than the United States; just wait until each person in both those countries has two SUV’s, an ATV, a boat, a jet-ski, a private jet etc etc etc.

Our time of living large is coming to an end and we are about to learn what it is to live in a "global" economy. The days of "biggie size" will soon be history so will restaurants serving an individual meal large enough to feed six.

Team Sergeant, your insights are ahead of some of the financial analysts. Dow Theory Letters published a portion of "Price Perspectives", which deals with commodities. In essence, they say about the same thing - except you beat them by 10 days!



Following the 1987 market crash, the Federal Reserve flooded the market with money to prevent a further decline. The injection of money lasted into the early Nineties, but inflation began to rear its ugly head. However, the US entered the North American Free Trade Agreement (NAFTA) in 1994 and as manufacturing moved to Canada and Mexico, lower priced imports brought inflation back under control. With inflation under control and increasing productivity holding inflation down, the Fed was free to continue pumping out money. Times were good.... The economy expanded as a result of money printing and inflation was contained through greater productivity and cheaper imported goods.

By the mid-Nineties, excess money flowed freely into the stock market and hedge funds grew by leaps and bounds. In 1998 a large hedge fund, Long Term Capital Management, became overextended and the Federal Reserve moved quickly to organize a $4.6 billion bailout. The bailout led many to believe the Federal Reserve would intervene in future large failures.

Assuming the Federal Reserve would come to the rescue of any major fund or banking failure, "leverage" became the mantra on Wall Street. The next major victim of excessive leverage was Enron in 2001. Although the Fed did not bail out Enron, they flooded the world with money once again following the 9-11 attack. Although inflation began to creep higher, China became a member of the World Trade Organization in early 2001. Manufacturing moved to China and cheap imports once again held inflation in check while the Fed continued to print money as never before.

By 2003, liquidity formed by war spending, tax cuts, and easy money from the Fed found its way into the housing market. In 2005, The Economists magazine called surging house prices the greatest bubble in history. However, Alan Greenspan, Chairman of the Federal Reserve, minimized the situation and said there was a little "froth" in the US housing market. Although signs of excessive money printing were obvious, an easy money policy was maintained as inflation remained under control through larger and larger imports of goods and services from India and China.

But, India and China's economies were booming through exporting goods and services to the US. As their populations became wealthier, they began demanding better food, cars and living standards similar to America. By 2005, oil prices reached $70 per barrel as India and China began competing with the US for fuel to meet their growing needs. Although fuel prices were rising, cheap imports held other prices down and the Federal Reserve once again ignored the growing threat of inflation.

Worldwide demand for fuel continue expanding as the global economy boomed. The US and Europe decided they could ease spiraling fuel prices by utilizing vegetable oils and ethanol to offset some of the cost of imported oil. In the meantime, growing global food demand was consuming the world's grain reserves. By 2007, it became clear the world was facing tightening supplies of both food and fuel.

In late 2007, the Federal Reserve was faced with a melt-down in the mortgage debt market. The only logical way to prevent a severe recession was by bailing out Wall Street banks. In an historic move, the Fed dropped interest rates from 6.25% to 2.0%. They also began buying mortgage backed securities from Wall Street banks. The huge volume of money pumped into the system over the past six months is unprecedented.

Over the past 20 years, the US has transferred its wealth to foreign nations. In return, we received cheap goods, cheap oil, and a higher standard of living. Now, foreign nations are beginning to use the transferred wealth to improve their standards of living. They are competing with the US for basic commodities we assumed would always be available.

We have been living beyond our means for too long... The piper has been paid with a fiat currency...We will now pay with inflated prices!