Change is on the way in the Arab world, with Egypt the latest focal point. Here I review recent events and their implications for world oil markets.
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I begin with a timeline, if not to connect the dots, at least to collect the dots in a single list.
• Sudan, Jan 9-15: Country holds a referendum whose apparent outcome will be a split of South Sudan into its own a separate country.
• Lebanon, Jan 12: Key cabinet ministers resign in protest against impending indictments from a U.N.-backed investigation into the 2005 assassination of former prime minister Rafiq al-Hariri, toppling the governing coalition. U.S. Secretary of State Hillary Clinton offered this assessment:
We view what happened today as a transparent effort by those forces inside Lebanon, as well as interests outside Lebanon, to subvert justice and undermine Lebanon’s stability and progress.
• Tunisia, Jan 14: President Ben Ali flees the country in response to widespread protests.
• Iraq, Jan 17-27: Over 200 people killed in a spate of recent bombings, a sharp and tragic increase from the recent norm.
• Egypt, Jan 29: Cairo appears to be near anarchy as a result of an uprising against President Mubarak.
• Yemen, Jan 29: Demonstrations and rallies have resulted in clashes with police, with unclear implications at this point for the stability of the regime.
An optimist might see the common thread in many of these developments to be the realization across parts of the Arab world of the power of popular will to overthrow dictators, the first step toward democracy and a better life for the people. A pessimist might see in at least some of these situations deliberately orchestrated chaos for purposes of seizing power by a new group of would-be ruthless leaders. A realist might acknowledge the possibility of both factors in play at once, and worry that ideologically motivated uprisings have often turned out to be usurped by groups with their own highly anti-democratic agenda. In the event that some of the transitions of power prove to be more chaotic than peaceful, let me comment on their potential to disrupt world oil markets.
| Country | Oil production | % of world total |
|---|---|---|
| Lebanon | 0 | 0.0 |
| Tunisia | 80 | 0.1 |
| Yemen | 258 | 0.3 |
| Sudan | 508 | 0.6 |
| Egypt | 662 | 0.8 |
| Libya | 1,789 | 2.1 |
| Algeria | 2,157 | 2.5 |
| Iraq | 2,384 | 2.7 |
| Iran | 4,237 | 4.9 |
| Saudi Arabia | 10,187 | 11.7 |
The table at the right reports the recent levels of oil production in the countries mentioned above and some of their neighbors. For the most part, the popular uprisings so far have been in the “have-nots” of the Arab world, with modest levels of oil production relative to the members of OPEC. Of the countries facing a likely immediate transition of power, the most important in terms of oil markets is Egypt, with 2/3 mb/d of its own production and another million barrels of oil being transported each day through the Suez Canal plus 1.1 mb/d crossing Egypt via the SUMED pipeline.
In my recent paper surveying historical oil shocks I discuss the Suez Crisis of 1956-57 in detail. In that episode, sunken ships blocked traffic through the canal for a considerable period. Pumping stations for the Iraq Petroleum Company’s pipeline through Syria were also sabotaged. At its peak, the episode removed about 10% of global oil production, a bigger percentage disruption than any subsequent oil shock. It took half a year for production from the Middle East to get back to normal, though there was enough excess capacity elsewhere in the world to bring global production back up to the levels at which it had been before the crisis within 3 months.
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My paper notes this description of what the original Suez Crisis meant for Europe at the time, taken from the New York Times on December 1, 1956:
LONDON, December 1– Europe’s oil shortage resulting from the Suez Canal crisis was being felt more fully this week-end…. Dwindling gasoline supplies brought sharp cuts in motoring, reductions in work weeks and the threat of layoffs in automobile factories.
There was no heat in some buildings; radiators were only tepid in others. Hotels closed off blocks of rooms to save fuel oil…. [T]he Netherlands, Switzerland, and Belgium have banned [Sunday driving]. Britain, Denmark, and France have imposed rationing.
Nearly all British automobile manufacturers have reduced production and put their employees on a 4-day instead of a 5-day workweek…. Volvo, a leading Swedish car manufacturer, has cut production 30%.
In both London and Paris, long lines have formed outside stations selling gasoline…. Last Sunday, the Automobile Association reported that 70% of the service stations in Britain were closed.
Dutch hotel-keepers estimated that the ban on Sunday driving had cost them up to 85% of the business they normally would have expected.
A closure of the Suez Canal at the present time would not be as economically damaging as the original. For one thing, there is less oil going through the canal today (1 mb/d in 2009 compared with 1.5 mb/d in 1956), and that flow is a significantly smaller fraction of the world total (1.1% today versus 8.8% then).
I think the bigger worry for oil markets would be that the process may yet spill over into other key oil-producing countries. Iraq will be a huge factor in determining medium-term growth in world oil production, and Iran is twice as important as Iraq in terms of current production. And should we see the temporary cessation of Saudi production, it would be an event without historical parallel.
I do not know where current developments will lead. But I am quite confident in the conclusion from my survey of historical oil shocks:
given the record of geopolitical instability in the Middle East, and the projected phenomenal surge in demand from the newly industrialized countries, it seems quite reasonable to expect that within the next decade we will have [an additional observation] with which to inform our understanding of the economic consequences of oil shocks.
We see the next oil shock most likely in the next 18-36 months.
Much depends on Saudi Arabia. The EIA current lists global spare production capacity as 4.65 mbpd. Of this, 3.75 mbpd is attributed to Saudi Arabia. However, many observers feel that Saudi is unlikely to ever produce more than 10 mbpd in sustained fashion. As Saudi is currently pumping 8.5 mbpd, this would imply global spare production capacity of 2.4 mbpd all in.
The IEA has reported that oil demand increased by 2.75 mbpd last year; the EIA STEO shows this number as 1.8 mbpd. Thus, were demand to grow as fast in 2011 as in 2010, and if production failed to grow, then global spare production capacity could be consumed this year.
The EIA, and we at Douglas-Westwood, see non-OPEC liquids production essentially flat in 2011. Thus, all incremental production is assumed to come from OPEC. As noted above, spare production capacity is 2.4 mbpd there, with Saudi assumed to be operating at max long-term production rates when this capacity is drawn. No material increases in OPEC oil production are anticipated in other OPEC countries–with the exception of Iraq.
It is generally felt that Iraq should be able to increase production at the rate of 0.5 mbpd per year for the next several years. In addition, OPEC NGL’s did very well last year–up 874 kbpd. We might expect some expansion this year as well, let’s say, 0.5 mbpd.
So, the world would appear to have 2.4 mbpd of one-time spare capacity + 1.0 mpbd / year, primarily Iraq and OPEC NGLs.
The IEA/EIA see demand rising at the pace of 1.4 mbpd in 2011; OPEC anticipates 1.8 mbpd. I personally doubt demand growth will be less in 2011 than 2010, which puts our forecast growth in the 2.25-2.50 mbpd range. This is consistent with anticipated long-term growth rates (primarily from China) and recoveries from the 1976 and 2001 recessions.
Put all the math together, and we might expect a draw of 1 mpbd on spare capacity this year, a similar amount next year, and after that, we’re quite likely out of spare capacity, as a practical matter. Once spare capacity is exhausted, we might expect an oil shock in short order.
Therefore, we could see an oil shock as soon as around election time next year. Or it could occur later, but it is hard to see how we make it to the end of 2014 without an oil shock somewhere along the line.
Professor I’m counting on you to let me know–ahead of time–when I should grab a shot gun, canned foods and run for the hills. I’m planning my victory graden right now as a contingency plan.
Anybody else think the Fed is partially responsible for this by devaluing the dollar, exporting inflation, and creating commodity speculation?
But you have to break a few eggs to make a Wall Street bailout omelet, right?
Oil is the sideshow.
Liberty and self determination are rights that we take for granted in the U.S.
Appreciate the fact that 250 years ago, America began experimenting with the idea that the only obstacle between self, and self determination, is an autocratic government.
We are an outlier. Historically, the common man has traded self determination for government protection.
However, our founders created a framework for a system of self rule. They created an example for the world. America demonstrated that liberty creates prosperity for the common man.
America’s belief in self determination is so strong that our sons/daughters, brothers/sisters, fathers/mothers offered their lives fighting tyrannical rulers that promise death to those who seek liberty.
Ignore those who seek to force their will on others. Ignore borders and wake up to the fact that our fellow human beings deserve no less than the liberty that we take for granted.
What is most interesting is:
1) history in making
2) The process Egypt revolution following Tunisia is a model, step by step, how these informed middle class Internet coordinated revolutions will occur everywhere with minor deviations-unrest, denial, clashes, blackout of SMS, mobile and Internet, cosmetic changes by regime, police and secrete service going rogue and trying to destabilize the situation so that people look back for “good” old days and rulers , people establishing militias for self protection, army not interfering or taking the side of the people, and finally, the dictator being ousted in one way or another, new popular transitional government, euphoria, reality of governing, splits , start of embryonic democracy with all the faults, old rulers partly returning to power under new guises after first 5 years of democracy bring disillusionment and some fatique( as happened in Russia in 2000) etc.
3) reaction of Israel-Arabs not ready for democracy- sure they are not, but they have to start one day, as we started after the collapse of the Soviet Union- there is no other way to get “ready” for democracy other than starting one., and it takes tens of years, generation before it becomes a true democracy. You will never get “ready ” sitting under a totalitarian regime.
4) USA completely taken by surprise and struggling to express any definite opinion … Damaging to the USA image as advocate of democracy and human rights completely, e.g. in my eyes definitely. This is a moment someone clever in the USA can catch to play loudly against the USA elites ( and taking the risk of becoming a target for Mossad or even CIA)
5) China communists again scared out of their wits and suppressing coverage of events in Egypt – they do not want their middle class (100 million) or students ( 36 million) get any idea which they anyway already harbor.
6) spreading of unrest via the Middle East and problems it creates for oil supply and Israel and, consequently the West. The local war in Middle East with Israel involvement is coming closer in leaps… But I still think not before Iran develops a credible nuke, say in 2014. Oil is on rise now for at least 2-3 years with spikes and drops, but the average will never again be below what we see today.
Exceptionally interesting, though scary as any change of such scale.
@W.C.Warones
Remember my prediction that DJIA will peak around 11750 in 2010? Well, QE2 extended it by a month to 12000, but exported inflation of food and energy that is hitting poor nations and creating geopolitical instability in , now we see, the Middle East. Which leads to oil prices going up from now on with peaks and dips, but reaching 160 USD by the end of 2011, and continuing into 2012 at least up to 190, with some TEMPORARY backdrop after that.
Now its clear that DJIA has peaked, so I guess You can have a look at other predictions I made then ( DJIA dip to quaterly y.o.y USA GDP falling around 2% Q4 2011 or Q1 2012 and continued recession throughout 2012 and first half of 2013, perfect for Sarah Palin to win Republican primaries, no chance for Obama or Any Remocrat or even establishment Republican to keep his seat).
We still do not know what Obama may tweak out when put in the corner of dire economic and geopolitical developments. He has not yet shown what he is made of.. But he has , together with Bernanke succeeded in exporting instability to the Middle East- I personally have nothing against it, long due for other people to start learning to govern themselves- but the short term USA interests are hard Hit. Interestingly, Iraq becomes a model now for others with their 10 year experience in democracy building- may be Bush was more visionary then he is credited with. Better to engage than deny the obvious.
Than, geopolitically, with the weak USA, instable Middle East, Iran pressing forward with nuke, Israel in instability zone, China losing faith in capitalism and looking to cash in geopolitical gains, afraid of democracy and clamping down on its middle class in 2012-2013 as Soviet Union did during previous crisis in 1929…
This crisis will not be wasted since its impossible to undo the systemic problems created in the USA and in the West in general by trying to reduce inequality by increasing leverage of the poor and middle class for >50 years. It will unfold with all political consequences such crisis usually brings , on an extended ( slower) time scale compared to 1929 sequence.
You did a great job here summarizing the situation, but let me add on there were protests consisting of roughly 300,000 citizens in Jordan, they shut down the internet in Syria, and I believe most recently there were protests in Saudi Arabia. By some blog accounts there was a lot of property damage in Saudi Arabia. There were links on it at ZeroHedge blog, so you can fish through their articles if anyone is interested.
Great stuff Professor Hamilton.
Evolution are required all over the world, they should not only be confined to the strategical geographical zones of energy production or pass through duct pipes.
The French revolution of 1789 occurs at a time when, according to P Gaxotte, the state head frame was poor, and the country rich.”The head was sick in a healthy body” Paradoxically all the modern forms of the capitalism were flourishing,venture capital such as Companie des Indes..When the state is weak in its thoughts and wisedom “all the individuals with the best leverages find a better place” no matter their misdeeds and past responsibilities. History is polluted with the missed social turns.The empire of Charlemagne was split among debilitated heads.A good prospect, for the soldiers of the time to pick up the pieces.
The church saw as well, a good opportunity to firm up its moral presence and its expansion.
The world of Davos is confined and restricted to three categories of individuals the prophets “those whom believe,but do not know”,those “whom do not believe, they do not know” and the agnostics.A civilization whom cherish the wrong prophets, the plutocrats.
Are revolutions a necessity?
Disappointing conclusion when looking at history, as most of the revolutions were built on a vacuum.In “Comment naissent les révolutions” the authors are prompt to state, that most of them were ill prepared,no real plans and running like a soap from hands to hands,except the Chinese revolution when considering years 1949 1950 to be the keystone.The fight for power had a social plan (right or wrong).Constantin, according to P Veyne “Quand notre monde est devenu chretien” was revolutionary when introducing Christianity, The author reminds us,the couple evolved in such a way that it was no longer the emperor politicizing the religion but the religion using the emperor when needs be (Hobbs was happy in his philosophy). The same author recalled to memory, Troisky and Lenine sharing the same hotel bedroom in St Petersburg and wondering what to do with their newfound powers.
Zeller in “Antiquite et moyen age” is referring to the Burgondes society where the political chiefs “hendinos” were deposed and banned in case of starvation or wars defeats,but their grand priests did not answer to their own guilt or public misfortune.
The only convincing proof supporting Einstein theory of relativity, is history.
To conclude this brief comments, may I introduce Ciceron On” Rome as an ally of Justice to Rome criminal”. Babylon may help to understand but not to translate this document.It s very interesting to read the whole text through translation.
7) Itaque illud patrocinium orbis terrae uerius quam imperium poterat nominari. Sensim hanc consuetudinem et disciplinam iam antea minuebamus, post uero Sullae uictoriam penitus amisimus; desitum est enim uideri quicquam in socios iniquum, cum exstitisset in ciues tanta crudelitas. Ergo in illo secuta est honestam causam non honesta uictoria. Est enim ausus dicere hasta posita, cum bona in foro uenderet et bonorum uirorum et locupletium et certe ciuium, praedam se suam uendere. Secutus est, qui in causa impia, uictoria etiam foediore, non singulorum ciuium bona publicaret, sed uniuersas prouincias regionesque uno calamitatis iure comprehenderet.
(28) Itaque uexatis ac perditis exteris nationibus ad exemplum amissi imperii portari in triumpho Massiliam uidimus et ex ea urbe triumphari, sine qua numquam nostri imperatores ex transalpinis bellis triumpharunt. Multa praeterea commemorarem nefaria in socios, si hoc uno quicquam sol uidisset indignius. Iure igitur plectimur. Nisi enim multorum impunita scelera tulissemus, numquam ad unum tanta peruenisset licentia, a quo quidem rei familiaris ad paucos, cupiditatum ad multos improbos uenit hereditas.
Externa libentius in tali re quam domestica recordor. Verum tamen quam diu imperium populi Romani beneficiis tenebatur, non iniuriis, bella aut pro sociis aut de imperio gerebantur, exitus erant bellorum aut mites aut necessarii, regum, populorum, nationum portus erat et refugium senatus, nostri autem magistratus imperatoresque ex hac una re maximam laudem capere studebant, si prouincias, si socios aequitate et fide defendissent.
@W.C. Varones,
You post some very unpleasant truth.
@tj,
I agree with your sentiment, but there was vast corruption back then as well. The BIG difference now is the corruption is much more entrenched and sophisticated. There is now a revolving door between Wall St., treasury dept and the FedRes….. it is “regulatory capture”.
And for all the party ideologues out there……. from the banker bonuses I see it appears there is not much difference for them when Democrats or Republicans are in power.
Funny how Wall St passes out millions upon millions in bonuses, while food stamp usage soars. They cause the crisis and get bailed out by both Bush and Obama by using the taxpayers money who just happen to be losing their homes and jobs.
Socialism for the wealthy and connected, disaster capitalism for us. I love what this country stands for, but am quite disappointed in where we are.
Regarding Iraq, their net oil exports were down in 2009, and they will probably be flat to down in 2010. Just to maintain constant net exports, at their current rate of increase in consumption they need to boost production by about 3%/year.
Here is a chart showing key data for the top 33 net oil exporters in 2005, along with Chindia’s (China + India) net import data. The two key trends are rising consumption in the oil exporting countries and Chindia’s rising net oil imports, as a percentage of global net exports.
http://i1095.photobucket.com/albums/i475/westexas/Slide3-1.jpg
If production by the top 33 net exporters falls by only 5% from 2005 to 2015, and if their consumption keeps increasing at the current rate, and if Chindia’s net oil imports keep increasing at the current rate, then the volume of net exported oil available to non-Chindia importers like the US would fall from 41 mbpd (million barrels per day) in 2005 to about 27 mbpd in 2015.
Re: Steven Kopits
Based on BP + EIA data, it appears that global net exports in 2008 were down from 2005 by about 800,000 bpd, despite US annual oil prices rising from $57 in 2005 to $100 in 2008. This was in marked contrast to the large increase in net exports from 2002 to 2005, in response to rising oil prices.
To the extent that there is excess production capacity worldwide, I suspect that it largely consists of what Matt Simmons called “Oil stained brine.”
Jeffrey –
You are correct. Even as oil prices have surged, production has not really budged. We are now entering the seventh year of the production plateau. It can no longer be claimed that we lack incremental assets for production; there is capacity all along the supply chain. Therefore, if this capacity is unable to materially lift production, then we would appear to be where we appear to be: on an undulating peak.
If so, how long can such a peak be sustained? If you knew nothing about the business, and just had a feel for graphs, you might say 5-9 years. Nine years is a pretty long time to hold production levels for an asset base with diminishing returns. As noted above, we’re now into the seventh year.
As for Iraq: I recently spoke to a senior drilling manager from a major oil field services company, who said to me (and this is a quote), “There’s a lot of activity over there!” Barring a political meltdown, I would expect to see some real production increases out of Iraq. Without Iraq, I think we’d be looking at an oil shock before the election. So paradoxically, it may indeed have been Bush’s “Mission Accomplished” which saves the Democrats’ bacon.
Or maybe not. If the supply-demand balance turns against us (and Jim has cataloged some of the risks), then the Obama administration could be trying to cope with yet another economic meltdown going into the election. While I am all for efficient lighting and wind turbines, I personally would have gotten my photo ops last week on a drilling rig in the Gulf of Mexico and at Schlumberger’s beautiful, Palo Alto-like campus in Houston (they’re all PhD’s there, too!). Supporting long-term energy improvements is fine, but the country is likely facing critical medium term challenges that deserve greater attention.
Steve,
I agree that Iraq will, in all likelihood, show increasing production, but as noted above at their current rate of increase in consumption, they need to boost their total liquids production by about 3%/year or so–just to maintain constant net exports (and the recent short term trend in net exports has been down).
And by the way, the North Sea, which peaked in 1999 at about 6 mbpd, is an interesting case history of a production peak versus post-peak production. North Sea oil fields whose first full year of production was 1999 or later showed a combined production peak in 2005 of one mbpd, but this production, equivalent to about one-sixth of peak production, only served to slow the overall decline rate to about 5%/year.
Incidentally, Egypt is a prime example of “Net Export Math,” as illustrated by the simple Export Land Model (ELM).
In 1995, Egypt was consuming 51% of their total petroleum liquids production. From 1995 to 2009, production fell at 1.6%/year, resulting in a simple percentage decline of 20% over a 14 year period. Over the same time frame, consumption rose at 3%/year, resulting in a simple percentage increase in consumption of 52% over the 14 year period. As a result, net exports fell at 21.7%/year from 1995 to 2009, a simple percentage decline of 95% (BP data).
Note that the rate of decline in Egyptian net exports was 14 times greater than the rate of decline in production (this is similar to what the ELM shows, and it is similar to the observed net export declines in Indonesia and the UK.
Most energy analysts would just focus on the 14 year 20% decline in Egyptian production–not realizing that this production decline plus a consumption increase resulted in a 95% decline in net exports.
A review of Peak Oil Vs. Peak Exports:
http://www.energybulletin.net/stories/2010-10-18/peak-oil-versus-peak-exports
Iran cutting off exports out of the gulf.
It was a major reason for the Iraq war, the threat that Saddam could eventually try to restrict shipment out of the gulf. Also, that we could not effectively deal with Iran without removing the wild card to the west first.
You get a weird mix of comments.
I don’t see much impact from closing Suez, assuming that happens, unless oil countries choose to use that as an opportunity to squeeze.
Steve, not to mention that in the meantime we should be pursuing our own oil while prices are high to reduce our trade deficit. Because we aren’t taking this logical step, it doesn’t inspire much confidence in the long term energy projects.
Hopefully Mr. “I can see the moon from my house” has more in the works than diffuse energy sources like the wind and sun for the medium term. Maybe he’ll surprise us with major nuclear and coal projects this year. We could flatter the Chinese by followimg their lead.
Excellent post JDH. May the Gods richly reward you with future oil shocks.
I can’t see this popular outrage affecting oil production and delivery unless the political contagion spreads in hard-to-predict ways. Is this an equity buying opportunity? Oil is also looking like an excellent short.
Thank you for sharing your paper, looks very interesting. At a “normal” market price of say $90/barrel when accounting for occasional oil shocks, won’t the cost of utilizing other energy sources become more attractive -> ie nat gas, even ethanol, and solar?
Re: At a “normal” market price of say $90/barrel when accounting for occasional oil shocks, won’t the cost of utilizing other energy sources become more attractive -> ie nat gas, even ethanol, and solar?
Oil is almost exclusively used for transportation and in industrial manufacturing (think plastics). Most alternative energy sources are for electrical production. Now, higher prices for the other major fossil fuels – coal and natural gas would make wind/solar/nuclear, much more appealing, but not the cost of petroleum per se.
When you say that only 1.0 MBD goes through Suez, you are not counting the Sumed flow. That can be up to 2.5 MBD.
So the total flow through the Suez chokepoint is probably 2.5 to 3.0 million barrels per day. This represents 3 to 3.5% of world oil production. of course, the oil can be shipped around the Cape, but the short term disruption and increased costs would be considerable.
Apologies. Your Sumed number is correct. It’s running between one and one and half million. Total Suez flow is therefore at most about 2.5 million.
I don’t agree with Goldman’s glib dismissal of closing Suez as merely adding 15 days to the trip. It’s more complicated than that and expensive.
Jeffrey –
I’ll confess I never had too much affinity for the export land model. Oil’s fungible. It would seem that what matters is total demand versus total supply. Where that demand surfaces would seem to be, in terms of price, largely irrelevant. But maybe I’m missing something.
Secondlook –
Yes, you’ll get substitution at $90. Oil’s three times as valuable as nat gas in the US today on the basis of btu parity. That won’t last. Nat gas will likely revalue. This could be due to increased use of nat gas as a transportation fuel in the US, but more likely elsewhere. For example, if you take a taxi in Rio, Beijing or Bangkok, it’s likely CNG-powered. But, yes, you’re correct, we’re not going to sit around for a decade saying, “If only we could use natural gas for transportation! It would be so much cheaper!” Somewhere in the world, natural gas will substitute for oil.
And if nat gas becomes more expensive, onshore wind can substitute into that space for electric power generation. That line of thinking is, quite literally, the Pickens Plan.
Interesting to see how this subject gets turned into a right-wing promo for “liberty” and Sarah . . but that said . . There will be fortunes to be made in another big short -oil.
1. Oil @ $90 is more an economic price than a cost of production price – $40 is profitable for producers.
2. Iraq has at least half the reserves of Saudi Arabia, . . supply, itself, is not a problem.
3. Conservation is working, “After seven decades of mostly uninterrupted growth, U.S. gasoline demand is at the start of a long-term decline. By 2030, Americans will burn at least 20 percent less gasoline than today, experts say, even as millions of more cars clog the roads.” That’s right were are going to used LESS gasoline. And less heating oil . . last year I replaced my old boiler, also resided my house using new energy techniques and products (both were required) and despite this cold winter I will use about 750 gal of oil this year, down from my max of over 1000 gal. I urge you to follow a few home construction / improvement sites . . it’s all about energy efficiency. (Chap. 9 “The End of Oil”)
4. Enough is Enough and the Plug In car . . . I’m betting that many Americans are like me, we’ve had enough of plutocrats, autocrats, and oligarchs and presented with alternatives like the Chevy Volt 100mpg, well, don’t be surprised if these are types of cars become “surprisingly” popular.
The biggest threat to all this is a Republican in 2012 and a return to the Bush/Cheney energy “policy”.
Jeffrey/Steven: The validity of the Export Land Model seems to depend on consumers in the oil-producing countries being shielded via subsidies from the market price that importers pay. That’s certainly true to a significant extent now, but I’m not sure to what extent it will last as oil prices rise. At some point, it becomes a lot of foregone export revenue, and the authorities will want to scale back the subsidies — see Iran.
romer: Some producers are profitable at $40, but those resources are almost all already in production, and many are declining. We tapped the best fields first, naturally. The marginal cost for fields that might be developed is probably more like $90 — I’ve heard numbers in that range for tar sands developments, for example. I expect the marginal cost, and thus the price of oil, to continue to rise as the better resources deplete.
More generally, I’m skeptical of looking at post-peak regions — Texas or the North Sea — as a model for the world as a whole. Those regions peaked in the context of rising supply elsewhere keeping the price down. (Yes, I know Texas production continued declining in the high-price 70’s. That says that (a) the supply response to price is slow, not necessarily absent, (b) the 70’s prices weren’t expected to be permanent — anticipated future prices drives the supply response more than current prices). I think we’re at the beginning of “plateau oil”, but the plateau could last several decades with gradually rising prices. There’s a lot of marginal oil that becomes profitable if a price of, say, $150 can be anticipated. And that price should be high enough to keep demand growth in check without completely wrecking the world economy.
Steve & JDH,
Great comments and a good discussion.
What is clear is that Western leadership have their heads in the sand. Sadly, the enormous pressure by environmentalists (UN supported IPCC and EPA attack on CO2) has had serious impact on Western strategic planning – to the point where most energy policies are no longer based on reality but on what are clearly ridiculous “pipe-dreams” (wind, solar, tidal & other inefficient inadequate sources of energy) – where is nuclear, where is coal and why is Offshore drilling restricted off 90% of the US coastline?
In reality, the West is probably already less than a year away from facing one of the biggest challenges of this new century. Rather than wind power and clean energy, the West should be aggressively converting to cheap natural gas as a transport fuel and encouraging conventional oil exploration and oil industry expansion in all known accessible basins on Western shorelines as well as continued expansion from unconventional sources like the Oil Sands.
Instead we had a “moratorium” in the Gulf and a public that has been educated to regard fossil fuels as dangerous (CO2 a plant food painted as evil & toxic). Instead, US Corporate Wealth funds are funding environmental activists to try and prevent further Canadian oil sands expansion and to prevent Canadian pipelines and tanker traffic in BC.
The next oil shock could well be the “Sputnik Moment” Western leaders are looking for (sad that strategic planners in Western Governments have failed to realize this). There is no geological shortage of fossil fuels but there are so many restrictions to access (geopolitical, technical etc.) that another shock seems inevitable. Sadly a shock could have been prevented through foresight and strategic planning – it is probably too late now, as very little of strategic value can be achieved in Steve’s 18 to 36 months…
Oil has had a run up and the talking heads are saying buy. Be very cautious before you take this advice. The panic indicators may be up but the real indicators are pointing down.
Steve,
Given a production decline in an oil exporting country, unless they cut their production at the same rate as, or at a rate faster than the rate of decline in production, then it’s a mathematical certainty that the net export decline rate will exceed the production decline rate, and the net export decline rate will accelerate with time.
So, I always ask for case histories of oil exporting countries, showing production declines–with meaningful levels of consumption–that contradict the ELM, i.e., what we are looking for is for oil exporting countries that cut their consumption at a rate faster than the production decline rate over a multiyear period.
Sorry. . . an edit button would be nice. Should read:
“Given a production decline in an oil exporting country, unless they cut their CONSUMPTION at the same rate as, or at a rate faster than the rate of decline in production. . . ”
In any case, assuming a post-peak export environment, the general trend in oil prices will be up, so even as net oil exports fall, in many cases, the exporting countries will show increasing cash flows (at least initially). Also, subsidies are of course a factor, and in any case developing countries have recently been outbidding developed countries for exported oil.
But fundamentally, to paraphrase George Orwell, some consumers are more equal than others, and I think that we will find that food and fuel supplies are not as fungible as we think. Consider Russia’s decision to ban wheat exports.
WC:
Money printing does end up in commodity price increases these days. But does it have to end up in street rioting?
Egypt is one of the least friendly countries for starting up a business. Poverty tends to exist in places where the people are stifled by government, either excessively paternalistic or excessively kleptocratic, so that they cannot do for themselves. Egypt’s poverty has many causes including the world’s highest population density if one excludes the desert but certainly the government’s failure to nurture a middle class is one of the biggest problems. Hong Kong is far denser but businesses of all kinds flourish there.
Romer JT – Very interesting comments. You’re in line with my thinking.
We are slowly eliminating our dependency on oil and giving money to unstable countries . With the turmoil in the Middle East, it makes sense that we turn our attention to other sources of power generation, i.e. natural gas, wind, solar, nuclear, etc.
Interestingly enough we have been warned and done nothing about this looming event. The question is not whether this will happen but rather when?
From a global perspective our current economic and social fabric is unfortunately tied to the production and distribution of oil. Oil fuels our transportation, logistics and in many developing countries still used for production of electricity.
I am not a conspiracy theorist, but the arguments are almost compelling to walk the path of such arguments. There is no doubt that we will be in dire situation if there is a disruption on the flow of hydrocarbons in the foreseeable future. Society overall needs to review the current situation and make changes in their lives to adjust accordingly. Perhaps instead of two or three vehicles we can use one smaller one, maybe the SUV is not really needed. We also need to continue funding alternative energy production and technologies to phase out our current oil addiction.
We should be drilling for the reasons mentioned before, but also I like the idea of a Strategic Long-Term Emergency Reserve. We drill and cap our most readily available oil and build infrastructure to get it to refinery, only to be brought online for a major supply disruption that could last over a year.