Only 17 more (oil) shopping days until December 31

Does everybody remember this story from July 3?

Oil prices could rocket to $100 within six months, plunging the world into an unprecedented fuel crisis, controversial Texan oil analyst Matt Simmons has warned.

There are 17 more trading days in December for this prophecy to be borne out. But I don’t hear Mr. Simmons offering to double-up on this particular wager at this point.

Bubba at the Oil Drum admits to being a little perplexed that we haven’t seen more of a move in Simmons’ predicted direction given that a third of Gulf of Mexico oil production remains shut in as a result of the earlier hurricanes, with a cumulative loss of a hundred million barrels so far. Bubba notes with derision the predictions of $25-$40 barrel oil from executives and OPEC, and thinks that $200 a barrel could prove closer to the mark, though the focus of such statements seems to have shifted from December 2005 to December 2010.


Data source: EIA
gas_demand.gif



Let me for my part point out that there is an alternative to the positions of the fiercest bulls and bears, which is that oil may be priced correctly about where it is right now. The basic reality that drove prices so high this year was the need to reconcile booming world demand with limited short-run ability to increase production and also to establish a current price consistent with the future depletion concerns to which Bubba refers. This fall’s price spike was sufficient to curtail U.S. gas use substantially, and despite big price declines from the September highs, the current level of U.S. gasoline use is about the same as we saw last year. Chinese oil demand, which had increased 18% between 2003 and 2004, was only 3% higher in the first 6 months of 2005 compared with the first six months of 2004. Sixty dollars a barrel seems to have accomplished its mission.

Predicting that oil prices could just stay put around $60 a barrel for the near term doesn’t make for the most exciting newspaper copy. On the other hand, if I prove to be wrong, I can at least take some comfort in the fact that, whatever happens, there will be lots of very smart people out there whose predictions were spectacularly farther off the mark than mine.


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35 thoughts on “Only 17 more (oil) shopping days until December 31

  1. Barry P.

    But Matthew “Trust Me, I’m an Investment Banker” Simmons hedged in this statement by using the word “could”.
    Of course oil “could” reach $100 by years end. I “could” also end up fathering Shakira’s children, if enough things fell into place. Both are about equally as likely to happen

  2. John

    Perhaps Simmons failed to anticipate the U.S. offsetting the supply shortfall with the SPR, or Europe shipping us 2 Mb/d. Best to avoid markets that can be manipulated by politicians. Now natural gas, on the other hand …

  3. B D McCullough

    The lines in the figure should not be
    colored (too hard to distinguish, depending
    on browser defaults, etc.) but should be
    solid and dotted.

  4. Barkley Rosser

    It is perhaps worthwhile to keep in mind that Simmons is also the author of the much-lauded _Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy_. I think he does a pretty good job of describing the geology and history and status of the major oil pools in Saudi Arabia, and the incredible importance and uncertainty around the biggest, al Ghawar. Some of this showed up on JDH’s AEI lecture, reproduced here.
    However, I would note that Simmons made a number of errors in his historical discussion of Saudi politics and royal history. He also downplayed the important fact that several areas of KSA have not been explored, notably the southern portion of the Empty Quarter (a’Rub al Khali).
    In any case, given that he has been one of the most credible of the more doomsaying peak oil folks, this does not provide much encouragement for the more extreme views of this group.

  5. John

    I agree with Simmons on Peak Oil. I disagree with trying to predict short-term oil prices. Prediction is difficult, especially of the future.

  6. Barkley Rosser

    John,
    Well, I know this blog already had a humongous discussion of Peak Oil, which should probably not be repeated. However, I would simply note here that there are many variations of the hypothesis. I (and I think JDH) would agree that at some point indeed, oil production will begin to decline globally, a “peak oil” point will be passed, and it will be very hard, possibly impossible, to reverse it. I have already been on record here as saying that the two biggies that will probably determine it are the degree to which overproduction in Russia blows off their pools soon (versus their development of new ones), and when al Ghawar in Saudi Arabia starts to decline, the discussion of which by Simmons in his book is excellent.
    What I criticized, and am criticizing, are the more extreme versions of the argument. So, I recently saw a film about this at a public discussion (where I was on the panel, and the “skeptic,” as it were, those darned economists). Simmons was in the film and indeed was the voice of reason. One of the commentators declared that we had already passed the peak oil point, but just had not realized it yet, and most others seemed to be predicting it as happening almost immediately. I would say it is very unclear when it will be, although the day will certainly come eventually.

  7. Bill Ellis

    Barkley
    The top of a mountain does look flat, when you are standing there. Perspective is enhanced by distance.
    In the end, every commodity is priced right. If the producers have information that prices will rise next week, month, or year, then they will inventory to the extent that is is profitable. When buyers have information that the market will decline in the near future, then they defer buying to the extent profitable. Ah, perfect market theory. Dramatic price variations are almost always a product of some outside event, hurricanes, wars, etc. Thus, the price of oil a year from now is about as much a product of what the weatherman predicts as it is about what the economists will predict.
    Someday, most everything will happen.
    Bill

  8. spencer

    Katrina caused us to lose a significant ammount of supply. Prices spiked to adjust for that. Now that supply is comming back on line prices have gone back to pre-katrina levels. But the basic trends that were driving up oil prices before katrina are still in place. Last December West Texas intermediate was $43 dollars. So it has still taken about a 20% price increase to keep oil demand from growing. That suggest the price elasticity of demand is very high. So if the world economy is still as strong as commodity prices and other indicators suggest, the price should resume its upward trend.
    Moreover, this upward trend has been in place while real oil US oil imports — us demand for OPEC oil –have not grown significantly.

  9. Tim

    Actually, demand and supply for oil are price inelastic in the short run. That means the supply and demand curves are quite steep and that supply and demand respond very little for a considerable move in price.
    The flip side of this is that eventual modest marginal adjustments in supply and demand can have a large impact on price.
    All of this conrtibutes to price volatility and means that the fundamentals that would create or allow a price move to a figure like $100 are not vastly different from those that could drop it to $30.

  10. T.R Elliott

    In my mind, Simmons lost credibility with his ludicrous predictions, which he later referred to as attempts to get attention. The latter statementlying to get attention–is ridiculous for someone in his position. To say that (paraphrasing) “I was lying to get everyone to pay attention” is unethical. So he’s either foolish and trying to make up for it, which is unethical, or just plain unethical by knowingly lying in the first place. Either way he hurts the cause in my mind, the cause being increasing public awareness.
    I’ve not been paying much attention to this whole peak oil thing lately. I’ve said here before that I thought oil was cheap at $30, kind of cheap at $50, and I don’t think it’s that cheap any more. I’m not buying.
    The best information I’ve seen on peak oil is probably the work Stuart’s been doing to look at depletionothers are doing similar work but their names don’t come to mindand JDH’s peak oil discussion speech that was referenced here a while back, the work of our dearly departed Richard Smalley, and a dose of Albert Bartlett’s cynicism about exponential growth.
    I think, in my lifetimeI’m 45and in my kids lifetime for certain, peak oil will lead to some major dislocations and hardships for society and its members. That is about all that we can say. Society will not prepare, and I’m not sure whether we can. We will increase production to meet growth needs until we can’t any more, and then the response will be somewhat unpredictable but not likely resulting in the total collapse of civilization, whatever that even means.
    There is room for some govt policye.g. carbon taxes, consumption versus income taxes, etc. Beyond that, the lurching serendipitous somewhat random nature of large populations and numbers will have to face depletion as it occurs.

  11. John

    Barkley,
    Could not agree more that extreme arguments are imprudent if only b/c they have a low probability of becoming reality. Hence, Simmons’ folly. Last I checked, Dec 2005 futures were not $100, nor were Dec 2009 for that matter. The plot above advocates p/d elasticity although I find it difficult to distinguish from the scale the, say, 2% demand destruction that implies. We know that consumers are abandoning SUVs. As I said, tapping the SPR has kept prices artificially low. If governments are unable to replenish those reserves in the long term, THAT might affect prices — but I don’t think they would want us to know about it until they had prepared their bunkers. But there I go getting extremist.

  12. Tim

    I would be interested to see if boat sales are falling in correlation with the drop in SUV’s because boating is a strictly optional leisure time, fuel intensive pursuit. I hope that JDH has the resources to find associated graphs examining this point.

  13. Joe Rotger

    A couple of comments…
    First, let me say that we were lucky that Katrina did not hit the US earlier.
    Let me explain, seasonality for gasoline peaks during the summer months, so, Katrina hit at the tail of the season; where, refining needs were starting to down slope.
    In any case, gasoline inventories are still below last year’s average inventory levels as shown in the EIA US gasoline Stocks chart:
    http://tonto.eia.doe.gov/oog/info/twip/twip_gasoline.html
    But, evidently, gasoline imports helped -and will continue to ease their prices.
    Winter demands that refineries put in high gear the production of oil distillates (diesel & heating oil). It’s also easier to import gasoline from Europe than distillates. I have a feeling this is why gasoline inventories are low, refineries are worried and shifting their production to get heating products out the door…
    Chart EIS US Distillate Stocks, shows oil distillates within last year’s average level:
    http://tonto.eia.doe.gov/oog/info/twip/twip_distillate.html
    In regards to crude oil,
    as expected, refineries are acting as a bottleneck due to Katrina damages, and,
    fortunately, the winter started mildly and this has allowed a buildup of inventories well above last year’s average level, as shown in EIA US Crude Oil Stocks chart:
    http://tonto.eia.doe.gov/oog/info/twip/twip_crude.html
    A good summary of the above is presented in the EIA Weekly Petroleum highlights:
    http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlite.pdf
    Check stock levels for a fast and excellent way of getting a good grasp of the situation.
    Rounding up, stocks appear too low considering growth. Furthermore, I still feel demand is strong; hence imo, prices should continue climbing, subject to seasonality -gasoline could take a short winter breather; but, the other three resume their ascent to test new highs.

  14. Stuart Staniford

    JDH:
    I am in near perfect accord with your views. I think that prices are high enough to set in motion significant SUV->small car type switching, and that this should be able to offset ongoing VMT growth in the OECD countries for a while. Fuel switching on heat/power in Asia will allow them some VMT growth also, so as long as supply doesn’t decline too quickly (something no-one really knows yet), prices are about right.
    Of course, at some point we’ll hit some kind of shock and prices will spike, but it’s anyone’s guess what or when.
    I talked to Simmons at length at the ASPO-USA conference. My general sense of him is that he’s mostly a savvy business person who’s general instincts are good, but he tends to see issues somewhat more black-and-white than they are, and I think is a little bit excitable and too unguarded with the press. He does often phrase his statements in caveated probabilistic terms, but I think leaves himself open to the media cherry-picking the more sensational scenarios to get a better headline.

  15. Rick

    One of the most interesting questions explored here is how quickly people are capable of adapting if oil prices shoot up. As professional people watchers, we all assume something different. Many Peak Oilers charge that “Joe six pack” will continue his abusive overuse of resources until it is too late. I disagree. People will respond as a herd, and demand will be reduced by any significant spikes in commodity prices. In many cases they respnd by over-reacting and following the crowd once it becomes “The thing to do”. It also doesn’t necessarily mean recession. New opportunities abound. Small towns may be revitalized, vehicle sales and manufacturing may be lifted by must have technologies, and the race to find supplemental energy systems increases the amount of viable players in the energy providing markets.

  16. Hal

    I read somewhere that U.S. oil consumption was flat this year compared to 2004, i.e. no growth year over year. Yet the economy did grow by several percent. Is this true, and if so how long can we keep it up?

  17. Boltwan

    Hal, oil is a determinant, but not the only determinant of a growing U.S. economy. Growth can still continue, depending on technological innovation among other things. As far as the time this can be kept up, that depends on how much technology innovation can outpace the economic need for oil.

  18. Stuart Staniford

    Hal:
    I estimate the economy can maintain roughly 3-5% separation between GDP growth and oil usage growth. It’s basically controlled by how fast we can swap out the vehicle fleet for more efficient vehicles (which has now begun in earnest with the collapse of SUV sales and revival of small car sales). Vehicle turnover is modest and fairly stable.

  19. john

    Hal
    The figures of short run price elasticity of demand for energy I have seen are about 0.10 ie a 50% rise in oil price brings about 5% drop in consumption.
    The long run figures I have seen are around 0.5, a 50% oil price rise in the long run brings about a 25% reduction in consumption– this typically takes up to 5 years.
    *However* incomes also rise, and the elasticity of energy consumption with respect to national income has the opposite sign (more income means more and bigger cars, driven further, between bigger houses).
    Empirically, US oil consumption rises by between 1 and 2% pa ie a bit less than real GDP growth of 2-3% pa. There have been very few breaks in that trend, usually after each oil crisis– there was actually a fall in oil consumption 1974-76 and 1980-82, I believe, although the latter included a very severe recession.
    My gut says we could cut US oil consumption by 30-40%: switching to smaller cars, diesel etc. But that move could take 10 years, in which time economic growth would wipe out half of it (ie 20%). Probably it takes sustained oil prices over $100/bl to motivate that kind of shift. Any faster fall in consumption could only take place if there was a very steep recession.

  20. Jack Miller

    Another way to sum up the situation is that there are an awful lot of folks who do not believe in the invisible hand of Adam Smith. Markets work. Peak oil is not nearly as important a concept as we make it because the market will replace oil as is necessary.
    We know that commodity prices always shoot past the equilibrium price on the way up and on the way down. I happen to believe that we are now on the way down. The current price is high enough to encourage conservation and new production. Next stop in the mid $40′s (in about a year from now).

  21. M1EK

    “Peak oil is not nearly as important a concept as we make it because the market will replace oil as is necessary.”
    “as necessary” can mean through “demand destruction”, all the way up to human catastrophe. While this is a rational economic consequence, it is not what most people have in mind when you claim the market can ‘solve’ the problem.
    Economics can trump neither physics (energy density of replacements) nor geology (amount and location of fuels).

  22. JDH

    zwf, “six months” from July 1 ends December 31.
    I also remember “December” mentioned in some of the other news stories at the time, though you’re right, the one from Guardian only says “six months” and “winter”.
    But I gave Simmons all the way until June 2006 when I talked about this issue here.

  23. John

    “Markets work. Peak oil is not nearly as important a concept as we make it because the market will replace oil as is necessary.”
    Hilarious. I’d like to suggest a corallary: “Nature will replace people as necessary.”

  24. waterboy

    To give Simmons some credit – it was only in May that OPEC made the decision to pump enough oil to allow OECD countries to build their stocks to multi-year highs. In July it still hadn’t filtered through that the policy was in operation – they only started talking about it openly towards the end of the summer – and it very much looked like a shock could provoke the kind of spikes that Simmons was talking about. It was only because of the stock build-up that the markets weathered the hurricanes relatively easily – but to see the effect on stocks, have a look at the EIA’s TWIP page and the massive drawdown on gasoline stocks that took them from 7-year highs to 7-year lows.

  25. John

    M1EK
    Yes and no.
    No in that supply always equals demand (less changes in stocks/ inventories which cannot fall or increase infinitely). The equilibrating factor being price (ex tampering by governments or monopolies). Whether that means oil is $10/bl or $200, is as yet unclear.
    The history of technological innovation shows that when faced with a price challenge, an economy can innovate. I have no doubt that if oil were $100/bl, we would discover ways to conserve 40% of the oil we consume, very quickly (in a matter of 4-5 years). The evidence being that on a per capita basis, some wealthy countries (eg in Europe, or Japan) consume about half what Americans consume in terms of barrels per capita. And Americans consumed half what they consume now in the 1950s.
    And once we have saved 40% of our oil consumption, I have very little doubt we will find ways to save another 40%, albeit at a much higher capital cost.
    And of course at $100/bl oil shale becomes a viable technology, and at $200/bl just about any alternative technology (wind, solar, coal to oil etc.) becomes viable. What it needs is capital, and time.
    Yes in the sense that the changes to our economy and society described above will not be simple and there will be substantial lags, which suggest that there will be unemployment and/or inflation. In the 70s, they gave us stagflation and 10% unemployment. It is certainly the case that there will be winners and losers, and the political systems of western democracies are poor at arbiting between those groups.
    The challenge will be to resist the political calls of those who wish to tamper with pricing, because of the distributional consequences between different groups. But the reality is the only reliable way to get the economy to use oil efficiently, is to let the price rise.
    In this context, a more ‘socialist’ system that redistributes some income to those worst affected, might actually be an asset in helping societies to adjust.

  26. M1EK

    “and at $200/bl just about any alternative technology (wind, solar, coal to oil etc.) becomes viable”
    No. It becomes economical, not viable in the sense that it could propel single-occupant motorists through the suburban sprawl that we’re now locked into. None of those technologies meet the EROEI or energy density constraints which would continue to make the American suburban lifestyle feasible. Batteries really haven’t progressed much since the EV1, which was barely tolerable for people who used the vehicle ONLY for commuting, and that’s not going to sit well with the Suburban-driving folks anyways.
    And rebuilding the suburbs so that commuting by means other than the single-occupant car is practical will be so incredibly expensive that we could only do it if oil were cheap. Oops.

  27. John

    “And of course at $100/bl oil shale becomes a viable technology, and at $200/bl just about any alternative technology (wind, solar, coal to oil etc.) becomes viable. What it needs is capital, and time.”
    It’s not about technology — it’s about the 1)energy break-even point and 2) rate of flow. 1) You may not be able to get more energy out of shale than you put into it to ‘crack’ the raw stuff into usable oil. 2) Shale can’t be scaled up to flow rates more than a few million barrels of oil a day equivalent. Same with tar sands. Those aren’t goibng to put much of a dent into conventional oil depletion on the other side of Hubbert’s famous peak. Wind and solar are not amenable to transport fuel and are so diffuse that, again, the scale can’t be achieved to replace more than a fraction of fossil fuels on a Btu basis. As for “coal-to-oil” (actually, it is coal-to-gasoline): 1) big conversion loss; 2) coal flow rates have their own peak; 3) big environmental toll. As for the latter, when we get desperate enough for energy, it will be open season on the environment. We saw a preview in microcosm with the relaxed standards post-Katrina. But have fun with your Adam Smith idolatry.

  28. John

    M1EK
    The world lives on many fewer barrels/ person than the average US citizen consumes. Western Europe and (especially) Japan are cases in point.
    And the average US citizen consumes more barrels/person/pa than his father or grandfather did (I’d have to check when it began to flatten out– around the mid 70s I think).
    So it’s certainly feasible to live and burn less oil. If you raise the relative price of one good, the consumption basket will shift.
    The US invests about 18% of GDP in fixed capital v. 40%+ in China. A big shift in energy usage would require a big increase in capex relative to GDP, say to the mid 20s. This is not unsustainable: the moonshot alone cost 1-2% of GDP pa throughout the 60s, and Vietnam another (3-5%?) on top of that.
    There are massive efficiencies that can be achieved in energy consumption in general. Although you are sceptical of battery powered cars, I can tell you they are becoming quite in evidence here in London– let alone SMART cars (north of 50mpg in City driving). OK London isn’t Omaha, but I suspect that the average US commuter travels less than 20 miles at less than 40 mph to get to work, which is doable with current technology. As I have pointed out to you before, Brits pay twice the price you do for gas, but they still drive lots (especially adjusting for higher traffic congestion and the fact that England is probably not a lot bigger than southern California (most people in the UK live in England: about 85%).
    Replan the suburbs? Again not in a hurry. But double the price of oil, and densities would increase– the biggest obstacles are planning (zoning) and the local howls that increases in density create.
    The bottom line is, we are not doomed, but the changes could be very big, and the more so if it has to happen quickly. The challenge will be about holding the socio-political system together whilst making that transition. The 70s was traumatic enough– 10% unemployment and 10% inflation for a lot of the years.

  29. John

    John
    (weird to post to yourself ;-)
    Agree that the energy ratios of some alternative technologies look unattractive. But at those oil prices they will be adopted. And the technologies to achieve them will get better.
    In 50 years time the planet will be solar powered (counting wind, solar voltaic, tidal, geothermal as ‘solar’). There won’t be that much uranium left (pace breeder reactors). There will still be plenty of coal around, but it is likely we will find the environmental costs too high (pace carbon sequestration strategies). There’s always fusion, but then there has always been fusion.. the promise is always just over the horizon ;-). It is entirely predictable that that is the end game (there is no other alternative) barring some technological revolution.
    The path by which the economy gets to that point is determined by the *price* of oil. That is how a market economy adjusts its consumption of any commodity. The effects on other variables (unemployment, inflation, consumption) can be grievous, depending on how fast the economy can realign itself.
    It is neither all gloom, nor will it be a simple painless path. A dollar’s worth a gallon of gasoline taxation now would be a good way to start getting ready.

  30. Patrick

    In 50 years time the planet will be solar powered (counting wind, solar voltaic, tidal, geothermal as ‘solar’). There won’t be that much uranium left (pace breeder reactors).”
    Er, there is plenty of uranium left … PLENTY.
    Many centuries of uranium resources in the ground, even if the US builds 500 nuclear power plants and goes all-nuclear for power generation.
    Which we ought to do, to solve the energy problem once and for all. See my blog post.
    To streatch our uranium from 200 years to 200,000 years, you can use breeder reactors, then it is basically an inexhaustible supply. Simply recycling used fuel would stretch it for many millenia.

  31. Douglas Hall

    Why use nuclear energy when there is an inexhaustible supply of air, water, waste and solar energy?
    The public does not want another Chernobyl, that fear will prevent us from even considering ore reactors.
    No matter where you are in the world, the sun shines. As in the UK we could use the immense solar resources avaliable to us. For even greater capacity we could use solar barges, boats that go with the sun.
    Why consider anything else?
    Biodiesel is more efficient, cheaper and much easier to come by than oil, let’s switch to that!

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