Crude oil prices this week reached their highest level since last April. What will that mean for U.S. consumers at the gas pump?
The first question to be clear on is which crude oil price we’re talking about. Two of the popular benchmarks are West Texas Intermediate, traded in Oklahoma, and North Sea Brent. Historically these two prices were quite close, and it didn’t matter which one you referenced. But due to a lack of adequate transportation infrastructure in the United States, the two prices have diverged significantly over the last year.
My rule of thumb has been that for every $1 increase in the price of a barrel of crude oil, U.S. consumers are likely to pay 2-1/2 more cents for a gallon of gasoline. The yellow line in the graph below plots the average U.S. retail price of regular gasoline in the U.S. over the last 4 years. The blue line is the gasoline price you’d predict if you applied my rule of thumb to the WTI price (assuming 80 cents/gallon for average tax and mark-up), while the fucshia line gives the prediction if you assume that the U.S. retail price is based on Brent. The three lines were quite close until Brent began to diverge from WTI at the beginning of last year. Since then, the U.S. retail price has tracked the world Brent price much more closely than it has WTI.
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Here’s a closer look at the data over the last year. Average U.S. gasoline prices fell more than you would have predicted based on the Brent price. They have since come back up. But Brent has surged another $10/barrel over the last two weeks, and gasoline prices have yet to catch up to that latest move. Based on the historical relation, we might expect to see the average U.S. gasoline price rise from its current $3.59/gallon up to $3.84.
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One factor that’s been driving Brent and WTI up over the last few weeks has been rising tensions with Iran. But why should threats or fears alone affect the price we pay here and now? Phil Flynn, a senior market analyst at PFGBest Research in Chicago, offered this interpretation:
We’re seeing panic buying in Europe and Asia because they’re absolutely convinced that they’re not going to be able to buy Iranian oil or there’s going to be some kind of conflict that disrupts the transport of oil through the Strait of Hormuz…. there is a lot of hoarding in case the worst-case scenario happens. Asian buyers have been buying up West African crude like it’s going out of style.
Does it make sense for consumers to suffer now just because of something that may or may not happen in the future? If there are significant disruptions, the answer will turn out to be yes. We’ll be glad that we used a little less today, and left a little more in storage, to help us better cope with the huge challenges we’ll be facing in a few months. If the answer turns out to be no, then this is all just a lot of pain for nothing.
And which will it be? Nobody knows. But there’s a strong profit incentive for people who buy or sell crude oil or crude oil futures contracts to try to get it right. If it turns out that Iranian tensions do not escalate from here, anyone who buys oil at a high price today and sells low when tensions ease will lose big. If tensions escalate, those on the buy side will do well.
There’s obviously also an incentive for the world’s leaders to try to keep those tensions from escalating.
Personally, I have more confidence in the market getting this right than the politicians.
I think that we need to differentiate between long term and short term factors that affect crude oil prices. In my opinion, average annual oil prices give us the best indication of fundamental long term supply and demand factors. And of course, Brent is a far better indicator of global prices than WTI.
The annual Brent spot crude oil price (EIA) doubled from $55 in 2005 to $111 in 2011. This is an average rate of increase of 12%/year, or the average six year rate of increase in annual global crude oil prices has been about 1% per month for six years. Of course, actual prices have been above and below the trend line, but this is the six year annual trend.
As I have, on occasion, noted I think that the primary factor affecting global crude oil prices is the post-2005 decline in Global Net Exports of oil (GNE), with the Chindia region consuming an increasing share of a declining volume of GNE.
I estimate that there are about 157 net oil importing countries in the world. If we extrapolate the Chindia region’s rate of increase in their combined net oil imports, as a percentage of GNE in 19 years just two of these oil importing countries–China & India–would consume 100% of GNE.
Assuming that the Chindia region’s combined net oil imports were to approach 100% of GNE around 2029, I estimate that the current CANE (Post-2005 Cumulative Available Net Exports) depletion rate could be on the order of about 8%/year (versus a 2005 to 2010 2.8%/year rate of decline in the volume of ANE).
The CANE depletion rate would be the rate that we are consuming the cumulative post-2005 supply of global net exports available to importers other than China & India. Based on a simple model and based on actual case histories, note that it is common for the initial depletion rate to exceed the initial annual rate of decline in net exports.
If, and obviously this is a big “If,” but if we extrapolate the 2005 to 2010 data trends, I estimate that the post-2005 cumulative volume of (net) exported oil available to importers other than China & India, or CANE, will have fallen by about 50% by the end of next year, 2013.
The CANE metric is very much analogous to a fuel tank. If we project current trends, the “fuel tank” that would provide exported oil to about 155 oil importing countries would be full at the end of 2005, and about 50% empty by the end of next year.
Slowly increasing US crude oil production (up from the pre-hurricane rate of 5.4 mbpd in 2004 to 5.65 mbpd in 2011) certainly helps, but we remain dependent on imports for about two out of every three barrels of crude oil that are processed in US refineries.
The dominant trend we are seeing is that the US, and most other developed OECD countries, are being gradually priced out of the global market for exported oil, as annual global (Brent) crude oil prices doubled from 2005 to 2011.
“I estimate that there are about 157 net oil importing countries in the world. If we extrapolate the Chindia region’s rate of increase in their combined net oil imports, as a percentage of GNE in 19 years just two of these oil importing countries–China & India–would consume 100% of GNE.”
Isn’t it clear that when you get the previous conclusion, that your assumptions are flawed?
“The dominant trend we are seeing is that the US, and most other developed OECD countries, are being gradually priced out of the global market for exported oil, as annual global (Brent) crude oil prices doubled from 2005 to 2011.”
So the richest and most well developed countries will be outbid for oil by poorer countries? Absurd.
Re: “So the richest and most well developed countries will be outbid for oil by poorer countries? Absurd.”
Rich,
It’s always helpful to look at actual data.
Following is a graph showing normalized oil consumption from 2002 to 2010 (2002 = 100, BP Data Base) for China, India, the Top 33 Net Oil exporters and for the US:
http://i1095.photobucket.com/albums/i475/westexas/Slide1-16.jpg
The recent trend has been pretty clear. Post-2005, developed oil importing countries like the US have been forced to consume a declining share of a declining volume of GNE, with the developing countries, especially the Chindia region, consuming an increasing share of a declining volume of GNE.
While it’s difficult to predict with certainty what will happen in the future, I suspect that we will see some version of the same trends going forward. And as noted up the thread, I presented some “What if” scenarios.
No, it’s not, Rich. The marginal utility of oil is much higher to a low consuming country than a high one. Thus, although the Chinese are comparatively poor, their economy is growing fast, and they are incrementally increasing their consumption, because the marginal utility of oil–at a low level of consumption–is higher than the marginal utility at a high level. And the statistics demonstrate this starkly. Of every six barrels of increasing Chinese oil consumption, four are being provided by OECD consumsers. China is drilling for oil on Main Street.
Now, follow this same logic (or graph it out if you prefer), and apply it to European fuel taxes. This means every increment of oil consumption squeezed out of Europe is going to have a greater and greater impact on their economies. We will see, over time, that European fuel taxes will become insupportable. (I would not be surprised if we were there today.)
the real issue is whether the Fed will overreact to some supply-side “inflation” (are those also the politicians not getting it right??). This is a good reminder that the are-we-measuring-inflation debate (vs relative price changes against substitutes not in the measured basket, say vs shale gas) is not often enough had.
Hopefully the Fed will not overreact.
Incidentally, this is a good reminder that vehicle-miles are not driving the gas price, and that gas consumption is down and refined products exports are up because Americans have responded to the prices by increasing energy efficieny. And the “highest prices since April” if they stay flat from here on out, still implies zero YoY change…. but i guess that gets lost in the reporting.
Steven Kopits wrote:
Now, follow this same logic (or graph it out if you prefer), and apply it to European fuel taxes. This means every increment of oil consumption squeezed out of Europe is going to have a greater and greater impact on their economies.
Steven,
Great insight on tax policy! Targeted taxes always face unintended consequences. High gasoline taxes create one of those as governments in an attempt to save by reducing oil consumption with high fuel taxes actually simply shift the usage to other countries like China and India.
I do believe that the US has been the leader in the world when it comes to inproving energy consumption efficiency. Developing nations consume much more per capita if for no other reason than volumn efficiencies.
I appreciate the insights you and Jeffery give us thought at times I believe you may under-emphasize the destructive role governments play in the energy game.
Professor Hamilton, great post and discussion point.
I believe the marginal utility of one additional unit of income is much greater to a poorer country, too. From what I can gather, China’s per capita gdp is about 17.5% of the US.
I don’t care what your data “says”, mindless extrapolation of past trends leads to absurd predictions. Your data doesn’t say anything – your theories interpret it.
I have posted on Econospeak regarding the matter of war fears pushing up oil prices. Suffice it to say, the politicians and mass media in both the US and Israel are way out of touch with what their intelligence agencies and at least the military in the US are saying regarding an Iranian nuclear weapons program. There is not one right now, even though apparently 71% of the US population thinks that Iran already has nuclear weapons. This is all just hysteria.
Here’s another way to think about it, Rich. We know that China, at steady state oil consumption, should be consuming about 60% per capita that of the US. That’s in line with Japan, Korea, Taiwan, etc. Steady state, based on the experiences of Korea and Japan, might be expected around 2030, at which time China will have a ratio of about 4.3 persons to each US citizen.
Do the math, and we would expect China’s steady state consumption to be around 2.5x US total consumption, or about 45 mbpd.
That would be with an unconstrained oil supply. If we assume a constrained oil supply of 100 mbpd (and Jeffrey might pan me on this, because the numbers suggests the total oil supply is likely to roll over this year or next), then we have to allocate China’s and the US’s and everyone else’s demand into that available pool. Do the math (allowing for other countries as well), and you come up with about 14 mbpd for the US and 28 mbpd for China in 2030. So how do we get there? As a functional matter, China has to outbid us for the available oil supply.
And they’re doing it right now. US oil consumption is falling at a 2.5% rate for the last six months–well ahead of the 1.5% rate required to get us to 14 mbpd in 2030. Happy to email you the supporting spreadsheets if you like. Or you can read the whole exposition in “Peak Oil Economics” (October 2009).
Rich,
Just to recap, I believe that your assertion was that it was absurd to expect that “the richest and most well developed countries will be outbid for oil by poorer countries.”
As noted up the thread, the data show that is precisely what happened from 2005 to 2010 (and available data show the same pattern continuing in 2011), as global crude oil prices doubled from 2005 to 2011.
So, your assertion is that this pattern will not continue? Other than a strong sense of denial over what the data show, do you have any explanation as to how the pattern will be reversed?
I guess we will have to wait and see what happens, but my bet is that the US and other oil importing developed countries will have to continue to take a declining share of a declining volume of Global Net Exports of oil.
In any case, following are some graphical data for 2002 to 2010 and some intermediate projections out to 2020:
Following is a graph for production & consumption for the top 33 net oil exporters and for Chindia’s net imports, from 2002 to 2010. As we expected, the rate of increase in top 33 net exports (GNE) exceeded the rate of increase in production from 2002 to 2005, but from 2005 to 2010, the rate of decline in net exports exceeded the (very slight) rate of decline in production.
http://i1095.photobucket.com/albums/i475/westexas/Slide09.jpg
If we simply extrapolate the 2005 to 2010 rate of change numbers on this graph, the 2010 to 2020 rate of decline in ANE would accelerate to about 5%/year, and if we extrapolate the other rates of change, but assume a 1%/year production decline rate for the top 33, the ANE decline rate would accelerate to about 8%/year from 2010 to 2020:
0.1%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide10-1.jpg
1.0%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide11.jpg
Incidentally, here is a recent quote by John Hofmeister, former CEO of Shell Oil Company (emphasis added):
CNBC video link:
http://video.cnbc.com/gallery/?video=3000072422
Hofmeister:
“What’s really unprecedented, Carl, is the fact that developing countries, especially China and India, have this insatiable need for more oil, and that has not been taken into account as we’ve thought about public policy in this country. So while we may be producing a bit more oil in this country, and while demand is down a bit, on a global basis I’m afraid we face a continuing onslaught of prices creeping ever higher. I hope I’m wrong in this. I’d love to be wrong, but we saw last year’s record gasoline prices through the course of the year, and we’re seeing the same phenomenon starting out this year, and I’m afraid it’s just creeping up and creeping up, and in the meantime you have refineries closing on the east coast because they can’t get the margin they need to stay open.”
Barkley-
It is interesting that you bring up Israel and Iran. I believe the dangers of war are grossly understated. The Iranians have made it quite clear that they want to eliminate the “Zionist entity”. The Israelis take this threat of elimination quite seriously. Should the Iranians succeed in hitting Israel with a few nukes, I do not doubt that the Israelis will hit the Iranians (and Hezbollah – why not?) with all they have, which will leave Iran a smoldering corpse and may turn the mid East upside down.
It also should be kept in mind that there have been recent production cutbacks in Nigeria, Sudan, and Syria for various reasons, just to add to the mix of problems on the supply side.
Ricardo, you say that like it’s a bad thing.
Shifting consumption to these other countries, with higher productivity from consumption, seems like a good thing to me (but taxes aren’t necessary and are likely a bad idea).
Rich,
Well, getting off into the Israel issue too far is probably not appropriate for this site, but it is not obvious that the dangers of war are exaggerated. None of the “adults” want it, but there are a lot of hotheads on several sides who might engage in acts that may bring it.
Ahmadinejad and some others have certainly made statements that I sympathize with Israelis for being very frightened by. However, Iran has not attacked another country since the 1700s (were you aware of that?), and one can easily see such rhetoric being popular inside Iran, even as these leaders would be sensible enough not to attack a country with reportedly over 200 nuclear bombs, probably including some of the fusion variety.
As it is, supposedly even Israeli military intel agrees with US military intel that in fact Iran isn not currently pursuing a nuclear weapons program. Why is it that so much of the public and the politicians in both Israel and the US cannot seem to accept this good news?
Pardon me for going off thread. In all of this discussion of oil and gas price increases how might I factor in the decline in natural gas prices with respect to the aggregate cost of energy flowing through to the consumer? Is it as simple as energy use per dollar value of GDP? Or is it more an effect that gasoline prices are more visible and as such readily translate into consumer inflation expectations? Seems an awful lot of people are getting very concerned over the prospect of $5 gasoline.
At least for the month of January, there was speculation in the market, with a substantial inventory build. Production for the month was the third highest ever, consumption was down sharply, and prices roses. That’s consistent with speculation, and most likely attributable to concerns about Iran.
It’s the supply side issue. There is a glut of natural gas (companies are capping wells) and supply lines are not at risk.
However, I’m not sure how much supply uncertainty may be driving oil prices. Oil prices should only be affected to the extent that oil can be stored and demand can be shifted from the future to the present (oil used to make products that can be stored and used in the future). Beyond that, uncertainty should actually lower consumption, especially over the long term.
A rich subject with poor subjected citizens, the oil prices and substitute sources of energy.As a good student, one may try to hang on quantitative evidences and draw interpretations afterwards.
“Oil Price Volatility and U.S. Macroeconomic” Activity Hui Guo and Kevin L. Kliesen, supplies evidences confirming the non linear shocks when dealing with oil prices and output (Cf Hamilton papers 1983, 1985, 2003)
“As seen in the figure 3:
although the two series move similarly, the 1-month futures contracts appear to be considerably more volatile than the 12-month futures contracts.
Figure 4 plots realized variance of 1-month (solid line) and 12-month (dashed line) futures contracts from 1984 to 2004 (quarterly). Increased volatility in the prices of 1-month futures contracts probably reflects that the market is more vulnerable to temporary disruptions in supply stemming from strikes, refinery shut-downs, or unexpected changes in inventories. These high-frequency shocks mainly reflect transitory noises.”
Oil and the Macro economy August 24, 2005 James D. Hamilton:
“Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices. One way to inquire whether this might be just a coincidence is with a statistical regression of real GDP growth rates (quoted at a quarterly rate) on lagged changes in GDP growth rates and lagged logarithmic changes in nominal oil prices”
Furthering the time serie under scrutinity J. Hamilton will add:
“All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960.”
M. Chinn find no, that is zero correlation between the long term futures in oil prices and the oil spot price.When dealing with asymetric information he will add through separate cover:
‘Akerlof says that the problem dates back to one that has confronted horse traders over the ages: “If he wants to sell that horse, do I really want to buy it?
Ricardo wrote: “I do believe that the US has been the leader in the world when it comes to inproving energy consumption efficiency. Developing nations consume much more per capita if for no other reason than volumn efficiencies.”
Maybe you should compare the US per capita crude and primary energy consumtion to other DEVELOPED countries, then you find that the USA is claerly at the lower end of efficiency. Your waste implies of course large saving potentials, but these are options not reality.
“But there’s a strong profit incentive for people who buy or sell crude oil or crude oil futures contracts to try to get it right.” Um, no there isn’t. There is a strong incentive to make a profit, which means there is a strong incentive for the price of oil to be wrong.
The threat of Iran is, as you say, speculative. Furthermore, it has already been priced into oil many times before, for instance, with the invasion of Iraq, with the Arab Spring, etc. Each one of those occurrences brings with it an increase in price derived from the threat of a closure of the Strait of Hormuz.
“Does it make sense for consumers to suffer now just because of something that may or may not happen in the future?” No, it doesn’t. The price of oil has risen because of the threat of Iran. However, in the event that oil supply is actually disrupted the price of oil will rise further. So what just happened there? One action, Iran, caused the price to rise twice. This makes sense since oil producers, including Iran, want the price of oil to be as high as possible — that is their profit motive, not to get the price “right.”
Your chart shows Brent and WTI prices converging once again begining in October even as Cushing inventories glut.
I think this is important in order to understand the role of speculation on oil futures prices.
In October, Connoco began shopping to sell its stake in the Seaway pipleline which moved oil from the Gulf to Cushing, presumably so the eventual buyer could reverse the flow of that pipleline to Gulf refineries and relieve the glut in Cushing. In November, that deal was finalized with Enbridge.
The reconvergence of WTI and Brent futures perfectly tracks the rise in speculation that reversing Seaway would eliminate much of the glut in Cushing with speculators originally forecasting 6 months to one year for the reversal project (now underway and expected to complete by June).
More recent recommendations from Goldman to its investors to buy September WTI crude futures will probably close the WTI-Brent spread altogether, so you can actually see speculation driving price increases for WTI futures contracts even as Cushing inventories build: it’s the anticipation that the Cushing inventory glut will be mitigated that is driving WTI futures higher, not the actual supply.
As fun as it is to focus on oil prices from a global macro view, there is a local micro view that is more telling about what is driving US oil price increases, I think.
Aaron wrote:
Ricardo, you say that like it’s a bad thing.
Shifting consumption to these other countries, with higher productivity from consumption, seems like a good thing to me (but taxes aren’t necessary and are likely a bad idea).
Aaron,
I don’t see where we disagree. If Western countries are shifting their consumption to the East because high taxes are increasing their costs and reducing production efficiency that is a bad thing. Improving technology to reduce energy consumption is a good thing, something the US has excelled at in recent years, but we must be careful because government intrusion has distorted the market to the point that real economic costs of production are obscured by accounting gimmicks.
Ulenspiegel,
Can you give me a source to support your comments? It is my understanding that the US produces about 25% of the worlds goods while only consumming about 22% of the energy resources.
The WTI price is basically irrelevant to global oil markets. Following are links to nine global spot prices.
Louisiana, currently at $124, tends to be the median price, within a range from around $106 (WTI) to $132 (Minas).
Brent http://www.bloomberg.com/apps/quote?ticker=EUCRBRN1:IND
Tapis http://www.bloomberg.com/apps/quote?ticker=APCRTAPI:IND
Alaska http://www.bloomberg.com/apps/quote?ticker=USCRANSW:IND
Dubai http://www.bloomberg.com/apps/quote?ticker=PGCRDUBA:IND
Louisiana http://www.bloomberg.com/apps/quote?ticker=USCRLLSS:IND
Urals http://www.bloomberg.com/apps/quote?ticker=EUCRURNW:IND
WTI http://www.bloomberg.com/apps/quote?ticker=USCRWTIC:IND
Oman http://www.bloomberg.com/apps/quote?ticker=PGCROMAN:IND
Minas http://www.bloomberg.com/apps/quote?ticker=APCRMINA:IND
Forties http://www.bloomberg.com/apps/quote?ticker=EUCRFORT:IND
Bonny http://www.bloomberg.com/apps/quote?ticker=AFCRBONL:IND
Ulen –
US oil consumption has been falling faster than that of Europe, just as our marginal utility function will suggest. So right now, in terms of oil, the US is indeed become more efficient at a (remarkably) faster pace than Europe, albeit from a higher level of consumption per capita.
It sounds like we don’t disagree at all. I think the shift of consumption is a good thing, but a tax will do as you say and shift productive use here to less productive use abroad.
Minor correction: there are 11 spot crude oil prices listed. I believe that the lowest price other than WTI is around $120.
So, the most recent (non-WTI) global crude oil prices range from about $120 to $135.
How about looking at GDP per unit of energy used? Units are 2005 ppp $ per kg of oil equivalent.
See: http://data.worldbank.org/indicator/EG.GDP.PUSE.KO.PP.KD
US = 5.6 in 2007, 5.9 in 2010.
UK = 9.9 in 2007, 9.8 in 2010.
Germany = 8.3 in 2007, 8.2 in 2010.
France = 7.4 in 2007, 7.3 in 2010.
Spain = 8.9 in 2007, 10.1 in 2010.
Canada = 4.4 in 2007, 4.7 in 2010.
Japan = 7.9 in 2007, 7.9 in 2010
China = 3.5 in 2007, 3.7 in 2009
Australia = 5.7 in 2007, 5.7 in 2009
S. Korea = 5.5 in 2007, 5.4 in 2010
Brazil = 7.4 in 2007, 7.6 in 2010
Italy = 9.5 in 2007, 9.5 in 2010
India = 5.1 in 2007, 5.1 in 2009
Russia = 3.0 in 2007, 3.0 in 2009
Mexico = 8.0 in 2007, 8.3 in 2010
This list includes the top 15 world economies.
The US is worse than every EU country, Mexico, and Japan. We are about the same as Australia. We are slightly better than India, and a lot better than Canada, Russia, and China. Seems like we could squeeze a lot more efficiency out if we made a significant effort to do so.
uber,
I will drop it after this because I do not want to belabor the point but your numbers are oil usage not energy usage. If the US could use coal and nuclear like the rest of the world your numbers would be significantly lower.
@Ricardo, Steven Koptis
If you use your global approach, you are right.
However, comparing GDP and energy consumption (thank you über_snotling!) or even worse GDP and oil consumption you get an ugly picture: the US gets ~2.5 times less out of one liter crude compared for example to Switzerland.
How does this difference affects your competitiveness? What is the chance to replace useful amounts of crude with natural gas in time? How do you assess the danger that money that is needed to pay for energy saving technology is eaten away by increasing crude prices?
(Sorry I am no economist but only a dump chemist :-))
Thanks, Herr Snotling. Broadly, the less efficient economies are improving their efficiency, while the more efficient ones are not. The interesting exceptions being Russia (okay, maybe not so interesting), Australia, South Korea and particularly Spain and India.
Australia has a mining boom which is transport fuel intensive, and Australian incomes are rising which increases oil consumption. I think South Korea has been doing a lot of construction. Russia is an oil exporter and the oil intensity of oil production has been going up. In Spain I guess we see the end of the construction boom, and the effect of all the new multi-lane highways.
Anyone know what’s up with India?
I have to agree in part with Rich Berger above that one has to be cautious about linear extrapolating from past trends with regard to crude oil, especially short term trends such as data since 2000, or especially since 2005.
But I think the point of the 12% increase per year in crude prices since 2005 is not that this price trend will continue, but that a key way in which these price increases will moderate must be that behavior will change, especially in the US and other OECD nations, in response to these higher prices.
The point is really the underlying fundamentals; China and India have about 35% of the worlds population, and about 2% of the worlds proven oil reserves. Canada by contrast, has only a half a percent of the world’s population, and has 12.5% of the proven oil reserves, with significant Canadian tar sands now considered recoverable with existing technology and market conditions. The US meanwhile has the majority of the worlds oil shale reserves, some of which could also be classified recoverable in the near future without much increase in current prices.
So in the short term, geopolitical events like the situation with Iran will remain significant drivers of oil prices. In the longer term, while we will likely see current high prices continue, this will lead not only to consumers reducing usage, and to shifts to other fuel sources like natural gas, but also to increased oil production in the US and Canada.
People are making a big deal out of gas prices. I wonder if maybe they are up partially because many more people driving, and driving more, due to the unusually great winter weather this year.
I look forward to the FHWTA data.
Re: “Increased oil production in the US and Canada.”
It’s true that if one ignores declines elsewhere, the picture looks pretty good. It’s as if half of your house is on fire. If you focus on the half of the house not on fire, you don’t see any problems.
US annual crude oil production rose from the pre-hurricane level of 5.4 mbpd in 2004 to 5.65 mbpd in 2011 (through November), versus the 1970 peak rate of 9.6 mbpd. This is helpful, but the former CEO of Shell Oil described it as a “trickle” of higher production.
We do have of course have production from thermally mature shale formations, like the Bakken and Eagle Ford, but insofar as I know there is no commercial production from the “shale” deposits in Colorado, which is really a kerogen rich marl deposit that has to be “cooked” in order to produce a liquid that can be refined. In any case, I suspect that the net energy to be derived from these kerogen deposits is, at best, minimal.
And of course, Canada has shown increasing net oil exports, which are calculated in terms of total petroleum liquids, but the combined net oil exports from the seven major net oil exporters* in the Americas and the Caribbean fell from 6.2 mbpd in 2004 to 4.8 mbpd in 2010, a 23% decline in six years.
The US and the other oil importing countries have been reacting to higher prices–as we have been outbid by the developing countries for access to declining Global Net Exports–and we therefore have been forced to reduce our consumption. In my opinion, this pattern will continue.
*Canada, Mexico, Venezuela, Colombia, Argentina, Ecuador, Trinidad & Tobago
WOW! VMT for Dec was up 1.3% over Dec last year.
Nov was down .9%. December’s high VMT is good news, a strong sign of real economic growth. For the year, travel was solidly down 1.2%, a sign that we were in a real (not technical) recession.
I expect that the Dec spike was due to the great weather and not likely the start of a trend.
Gasoline consumption is way down though, not a factor in high prices. The drop is certainly due to the great weather.
Steven,
Your quote in bold below and a news story on ABC tonight that ~$14.50 of a tank of gas can be attributed to speculators raises a question. The question stems from you earlier post that China has a relatively high marginal utility of oil.
At least for the month of January, there was speculation in the market, with a substantial inventory build. Production for the month was the third highest ever, consumption was down sharply, and prices roses. That’s consistent with speculation, and most likely attributable to concerns about Iran.
If futures and spot prices are based on expectations, and China expects higher prices in the near future, then wouldn’t their high marginal utility of oil (fundamental=demand) require that they view current prices as a bargain? If true, and given their(and similar high marginal utility buyers) potential to drive the market with their volume; Why do you/ABC attribute a simultaneous rise in price and excess supply with speculation?
I am not being snarky, I enjoy your posts. I am just wondering if China et.al.’s market power and high marginal utility might explain a portion of the oil price that is commonly attributed to speculation….Thanks!
In the Dec FHWTA report, the figures are quite interesting.
A very clear double dip evident in the 12 month moving average.
2011 traffic volume is generally below both 2009 and 2010 levels for both urban and rural.
Good posts Barkley Rosser: There is much inflammatory rhetoric on all sides. Statements from Iran intending to dismantle the Zionist State have been conflated into ethnic cleansing or genocide campaigns.
People also exaggerate the usefulness and danger of nuclear weapons. Canada, the USA and France have gifted nuclear weapons to Israel, India and Pakistan, over the years and there has yet to be nuclear war. Nuclear weapons border on useless for offensive purposes. Iran does not have the capability to deliver weapons–conventional or nuclear–to Israel and then put sufficient boots on the ground to control territory. By contrast, the diffusion of UAVs poses a much greater threat to western security, and by extension, eventually the security of Israel.
A complicating factor is the fact that most Arab states bordering on the Gulf of Persia distrust and fear Iran.
Israel could always help by offering to unilaterally dismantle its nuclear arsenal. Her formidable armed forces are what keep Israel and conquered territory safe. That and US, UK and French nuclear umbrellas. The threat of massive reprisals is what keeps everybody including the North Koreans well behaved.
JDH: thanks. Interesting and useful post as always.
I’m starting to build a short position on WTI oil using levered ETFs as a hedge to an overweight overseas upstream oil exploration portfolio. That tells you where I believe oil prices will eventually go.
VMT looks to be at 2009 and 2004 levels.
Fuel consumption the last four months looks to be at 2000-2001 (Nov-Feb) level. So fuel economy looks to have improved some since 2000.
2009 gasoline consumption was at about 2004-2005 (Nov-Feb) levels, so it looks like there has been no improvement in fuel economy since 2005.
Hopefully my health will allow me to take a more thorough look in the next month or so.
Jeffrey:
“The US and the other oil importing countries have been reacting to higher prices–as we have been outbid by the developing countries for access to declining Global Net Exports–and we therefore have been forced to reduce our consumption. In my opinion, this pattern will continue.”
Agree. I would guess US consumption would decline by at least 5% by 2030, and possibly even 10% or more.
There will be a production response as well though. Consumption responds pretty quickly to higher prices. Production, especially due to investment in new sources, has a long lead time. So the initial response has been mostly on the consumption side, but the production response will get stronger with sustained higher prices.
To put it in terms of pump prices, I wouldn’t be surprised to see $5 a gallon before too long, but I might be surprised to see $10 a gallon anytime in the next decade. So I think the recent price trend reflects underlying fundamentals and won’t reverse, but it won’t continue on quite the same trajectory either.
Re: acerimusdux
Empirically, rising oil prices don’t seem to have much effect on conventional crude oil production peaks. The following graph shows crude oil production for Texas and the North Sea around their respective production peaks, on the horizontal axes, with annual crude oil prices on the vertical axes:
http://i1095.photobucket.com/albums/i475/westexas/Slide1-1.jpg
In the US we are seeing increasing production, but we remain well below the peak production rates of the early Seventies, so in mathematical terms, the rate of decline in production, relative to a prior peak, has slowed.
Note that US oil consumption (total petroleum liquids, BP) is already down by about 8% from 2004 to 2010, as the US was forced, via rising prices, to reduce our consumption.
Rising prices are certainly a factor in increased unconventional production, but as noted up the thread the increase in Canadian net oil exports, largely as a result of tar sands production, was overwhelmed by the overall regional decline in net oil exports.
But one needs to keep in mind the magnitude of the probable declines in Available Net Exports (ANE) that we are looking at.
Following is a graph for production & consumption for the top 33 net oil exporters and for Chindia’s net imports, from 2002 to 2010. As our model predicted, the rate of increase in top 33 net exports (GNE) exceeded the rate of increase in production from 2002 to 2005, but from 2005 to 2010, the rate of decline in net exports exceeded the (very slight) rate of decline in production.
http://i1095.photobucket.com/albums/i475/westexas/Slide09.jpg
If we simply extrapolate the 2005 to 2010 rate of change numbers on this graph, the 2010 to 2020 rate of decline in ANE would accelerate to about 5%/year, and if we extrapolate the other rates of change, but assume a 1%/year production decline rate for the top 33, the ANE decline rate would accelerate to about 8%/year from 2010 to 2020:
0.1%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide10-1.jpg
1.0%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide11.jpg
Apologies for my mistatement. Fuel economy did improve significantly from Aug 07 to March 09, then declined slightly until 2011 when it again improved substantially and traffic volume dropped to crisis levels.
TJ –
US oil consumption stagnated in July 2010 at only $75 / barrel. It started falling in Feb/Mar 2011 at around $95. So the US carrying capacity–the price at which consumption starts to fall-is about $95 (arguably, Brent), not $110 or $120.
As for China, it’s carrying capacity is estimated by both myself and Francisco Blanch of BoA/ML at US + $10-15, so figure $110 Brent. And indeed, China consumption appears to have stagnated since April 2011. Arguably therefore, in both theory and practice, it would appear that China sets the price of oil. Should China’s oil consumption begin to fall, a fall in oil prices is all but assured.
So, Brent at $125 is no bargain for the Chinese.
When the price rises above the sustainable price, which we will allow as the maximum carrying capacity of China (to oversimplify a bit), then that can be for two reasons, in my opinion.
The first of these is traditional “speculation” characterized by inventory builds. We see that in January, probably as a result of Iranian tensions.
The price can also be above the long-term sustainable price, it seems to me, to overcome the stickiness associated with inelastic demand. That is, the price must rise well above the sustainable price to induce a traumatic reduction in consumption–an oil shock induced recession. That’s the normal path of adjustment.
That the US is not in recession is due to the very much increased elasticity of demand since about Sept. 2011. That is, with increased oil prices, the US has been shedding demand quickly, but has been able to increase the efficiency of oil consumption in GDP to offset.
Rich Berger: What you may be missing in your rich country-poor country comparison is that although the U.S. has more money per-capita than China, we also use a LOT more oil per capita. If we have 6X more money per person but use 11X more oil per person, it’s perfectly reasonable to expect our market share of oil consumption to decline due solely to market forces. Nobody is projecting China to use more oil per person than the U.S., only to use more per person than they do now, and the U.S. to use less per person than we do now.
JB:
Oil markets are mostly global. Why would we expect any relationship with regional peaks? Moreover, it’s a typical supply and demand dynamic: higher prices lead to increased production, but increased production also leads to lower prices. So you won’t see a simple one way linear relationship in the data.
But looking at global production, we last had a production peak in the mid 1970s, following over two decades of strong production growth, and we had a sharp price increase at that time coinciding with that peak.
What happened then was that steady production growth resumed by the mid 1980s, and prices again moderated. This happened in part due to increased investment in response to higher prices.
The dynamic this time will be similar. I don’t expect to see global production increases again at the same rate, but I wouldn’t expect the production trend from 2005 on to continue either. After all, prices are not what they were in 2005.
acerimusdux: “Oil markets are mostly global. Why would we expect any relationship with regional peaks? ”
I would argue that if regions peak and decline, then global production–the sum of the output of regions that peak and decline–would also peak and decline.
Five annual “Gap” charts follow, showing the gaps between where we would have been at the 2002 to 2005 rates of increase, versus the actual data in 2010 (common vertical scale):
EIA Total Liquids (including biofuels):
http://i1095.photobucket.com/albums/i475/westexas/Slide1-18.jpg
BP Total Petroleum Liquids:
http://i1095.photobucket.com/albums/i475/westexas/Slide06.jpg
EIA Crude + Condensate:
http://i1095.photobucket.com/albums/i475/westexas/Slide05.jpg
Global Net Oil Exports (GNE, BP & Minor EIA data, Total Petroleum Liquids):
http://i1095.photobucket.com/albums/i475/westexas/Slide07.jpg
Available Net Exports (GNE less Chindia’s net imports):
http://i1095.photobucket.com/albums/i475/westexas/Slide08.jpg
I would particularly note the difference between the first chart, total liquids, and the last chart, Available Net Exports (ANE).
Consider the first 15 minutes after the Titanic hit the iceberg versus the last 15 minutes before the ship sank. In the first 15 minutes, only a handful of people knew that ship would sink, but that did not mean that the ship was not sinking. In the last 15 minutes, it was readily apparent to everyone that the ship was sinking, but by then it was far too late to try to get to a lifeboat.
ba21-
Aggregated country demand figures also leave out the heterogeneity of consumers within the country. When prices go up, the marginal consumer cuts back. If you drive a long distance to work, it may cut into your budget, but it is really a necessity. The joyride on the weekend, on the other hand, may go. You may also decide to consolidate shopping trips or vacation closer to home.
In reality, peak oil (or peak anything) is meaningless unless price is taken into account. Rising prices mean rationing of consumption and incentives for greater production and use of substitutes. We will never run out of oil, just as we never ran out of guano or whale oil.
For some reason, I’m getting a slightly different result (i.e. gasoline prices do not lie between WTI and Brent) for the recent past… can someone hazard a guess as to what I am doing wrong?
http://research.stlouisfed.org/fred2/graph/?g=5oK
Nobody: Looks like maybe you forgot about gasoline taxes and ignored the mark-up. My figure above uses 80 cents/gallon for the combined contribution of these, as described in notes to first figure.
My apologies if this is double-posted; I tried to post this comment earlier and an unsure whether I was successful.
I have attempted to chart gasoline versus crude oil prices here:
http://research.stlouisfed.org/fred2/graph/?g=5pa
If you adjust the chart to show the recent past (e.g. 2011-2012), it appears that gasoline prices have increased faster than both WTI and Brent prices.
Could anyone hazard a guess as to what I am doing wrong? Why doesn’t gasoline lie between WTI and Brent, as in the above post?
Thanks.
Thanks, JDH. Two questions:
(a) Unless I’m misunderstanding, shouldn’t the affect of these be to make crude prices cheaper? (i.e. if gasoline prices increased faster than unadjusted crude prices, adjusting the crude prices should only increase the gap (by lowering the crude price), rather than decrease the gap (by increasing the crude price))
(b) Because these are constant revisions to the crude prices, they shouldn’t affect the slope of the gasoline price. I’ve tried to re-calibrate the graph to show what I’m talking about:
http://research.stlouisfed.org/fred2/graph/?g=5pe
Sorry – I inadvertently screwed up the starting date in the previously posted graph. Here’s one starting at 1/1/09.
http://research.stlouisfed.org/fred2/graph/?g=5pg
Nobody: You’re misunderstanding the scale and intercept correction. Try calculating the formula exactly as I gave it. If you change both the scale and the intercept then yes, your graph isn’t going to look like mine, and that’s because your graph isn’t telling you what you think it is.
Thanks, JDH. I’ll give it a try.
Thanks, JDH – your suggestions worked:
http://research.stlouisfed.org/fred2/graph/?g=5pi
If it isn’t too much trouble, could you explain your rule of thumb?
Re: the rule of thumb – it appears that it would sometimes result in a gasoline price below the crude price – http://research.stlouisfed.org/fred2/graph/?g=5pk
Did something happen to change the rule of thumb? (and this isn’t to criticize the rule of thumb.)
Ok – enough of my comments. It’s just a conversion of gallons to barrels. Duh. The change would be in the .8 for markup. Makes sense. Thanks.
Nobody: In addition to being the value one would expect from approximate units conversion, the coefficient of 0.025 emerges from historical regression analysis as well as visual fit to graphs like the ones above.
Thank you for taking the time to respond, JDH – much appreciated.