Posted on 07/26/2008 11:40:12 AM PDT by kellynla
Oil was selling for $123 a barrel on May 7, and that's where it closed this week. Sounds like a calm and rational market, except for the fact that just last week it was going for $145.
Which price was right, $123, $145, or something else? Before you let anybody give you an answer to that question, try to get them to comment first on the following two facts. (1) According to the Energy Information Administration, China consumed 7.6 million barrels of petroleum each day of 2007, which is 860,000 barrels/day more than in 2005. (2) EIA also reports that the world as a whole produced 84.6 million barrels of oil per day in 2007, which is 30 thousand barrels per day less than 2005.
Now, how could it be that China is burning 860,000 b/d more than it used to, but no more is being produced? Well, it could be that there are errors in the consumption or production numbers, and both will likely be revised. Or it could be that we're drawing down global inventories. But the most natural inference is that somebody else in the world must have been persuaded to reduce their consumption of oil between 2005 and 2007 to free the barrels now being used in China. And indeed, according to preliminary EIA estimates, petroleum consumption in the U.S., Japan, and those countries in Europe for which data are now available fell by 760,000 b/d between 2005 and 2007.
Here's the framework I would propose for answering the question of how much the price of oil should have risen since 2005-- the price of oil needed to go up by whatever it took to persuade places like the U.S., Europe, and Japan to reduce their consumption by the amount that China, the newly industrialized countries, and oil-producing countries were increasing theirs.
And how big a price increase would that be, exactly? Somebody who claims to know that would need to have more confidence in their estimate of the price-elasticity of oil demand than I have in mine. But if your answer is that a much smaller price increase than the one we observed would have been sufficient to produce the requisite decline in quantity demanded, that would seem to imply that, since price went up by much more than you believe was needed to reduce demand, the quantity demanded must have fallen by much more than was called for. One place that might have been expected to show up is in the form of an accumulation of inventories. The black line in the figure below shows the average seasonal behavior of U.S. crude oil inventories. The red line demonstrates that current inventories are if anything below normal. On what basis, then, could one insist that the quantity of oil consumed has fallen more than was necessary?
OK, suppose you believed that the price increase we actually saw-- from $42/barrel in January 2005 to $96 in December 2007-- was just the right amount to accomplish the task of balancing global demand and supply for 2007. Should the price have held steady from there in 2008? Figures reported by Rigzone imply that China imported an additional 8.97 million tons of crude and 2.96 million tons of refined product in the first half of 2008 compared with 2007:H1, which converts to a 480,000 barrel/day increase. Where's that supposed to come from? A U.S. recession, which many of us were anticipating in January, certainly would have brought demand down. But current U.S. GDP growth is likely to come in higher than many of us had predicted earlier, meaning if you gave one answer for the correct price of oil in January, you should be giving a higher value for that number today. On the other hand, the data coming in the last two weeks have raised the probability of a recession in Europe. If that occurs, it will bring a reduction in the quantity demanded from those areas even if the price begins to fall. Whatever the correct price of oil was two weeks ago, I think it's a lower value today.
What about the delayed response of quantity demanded to the price increases already in place? If that proves to be substantial (and I'm of the opinion that it will), U.S. petroleum consumption should continue to decline during 2008 even with no further price increases and no recession. There's also been some increase in global production this year, and more is expected. Won't that be enough to satisfy those new and thirsty Chinese vehicles? If so, $123/barrel may be way too high a price.
But don't forget, while you're doing these calculations, you'll need to meet Chinese demand for 2009, and 2010, and 2011.... Which, if you project the current trend and tried to satisfy entirely by cuts in U.S. consumption, would have us down to consuming zero barrels of oil in the United States in about 17 years.
Is the price of oil today too high given the fundamentals? Could be. Is it too low? Could be. But one thing I'm sure that's too high is the confidence on the part of those who insist they know the answer.
And for the past five years, we have been paying for the war in Iraq & Afghanistan on BOTH ENDS by purchasing oil from our enemies!
ping
It’s like we are paying the expenses of both sides in the war.
Bottomer line.
If we don’t do something bold to change the fundamental dynamic we are going to become poorer poorer as compared to other societies (Europe).
Here’s a novel thought. PROPOSE SOMETHING MCCAIN.
I’ll give you one. We need to one up the Euros on the subject of 18 wheel transport. That’s the backbone of our system, the 18 wheeler. In Germany, all transport trucks stay glued to the right lane and move in a a conveyor-like manner. How about we take that idea and make a huge improvement?
Let’s propose a replacement for the aging interstate system centered around once concept - ferrying instead of directing. What if we built an interstate conveyor ferry like you see at the airport terminals. Trucks pull and get off according to the computer instructions. The entire system is fueled by nuclear powered electricity, a national grid of plants and conveyors Truckers would piggy back the conveyors until they needed to exit and drive the remainder of the way to their destinations. At least it’s something bold and innovative. A land based ferrying conveyor system. Come on McCain, offer up something BOLD.
“It’s like we are paying the expenses of both sides in the war.”
WE ARE!
Our current leadership is utterly and completely failing us.
And not so much the President (although he’s plenty to blame) but definitely the leadership at every level that seems to be frozen with paralysis. No ideas. Sure we are being manipulated by adversaries and oil exporter in this election year but things are not right overall. To focus only on the obvious shortcomings of Obama seems like failure just the same. Everyone else is getting let off the hook. Congress ought to be getting a thorough enema this year but it probably won’t.
.
What happens when your conveyor system breaks down as all manmade systems occasionally do? Then all trucks are stopped not just one. At what speed would it travel? How would entering and exiting take place at those speeds? How does a truck gain entrance speed and then suddenly stop once on? How will the truck slow to exit speed? Once dumped on a no longer moving surface what does the trucker do then?
Our current leadership is utterly and completely failing us.
If you are talking about Reid and Pelosi and the other Democrats I agree but I suspect you are not. I am perfectly happy with Cornyn and Hutchisen and all Republican Representatives from Texas. You?
I agree we should be allowed to produce as much product as private industry deems sufficiently rewards their risk.
However, let us not lose sight of the possibility that a barrel of oil produced from shale in the U.S., for example, might cost $200.
Were we to drill in ANWR, the cost of infrastructure and transport may cost the same.
The shale potential was discovered long ago and there was nothing to stop oil producers from reaping it. It must have been uneconomical.
The Alaska Pipeline was a huge expenditure and the oil we get through it was once the most expensive.
I don't think there is a magic bullet here.
If you really want oil’s price to stabilize, give it a competitor.
The Roads Must Roll
No change in the combustion engined truck. It could stay exactly as it is today. How do you get on and off the conveyor at the airport terminal? You adjust your speed. All your questions are simple engineering problems. If it can be done with a car wash, it can be done interstate. Nuclear is the obvious choice for electrical supply to the conveyors.
In Germany, these trucks are all going the same speed and arriving at a certain time. Surety of arrival time is more important than speed of transport in many cases. And yes things can break down. That’s when you get off and take I-10 like the old days. Think of it as what the interstates were for the farm road this will be for the interstates.
We need to kick the rest of the world’s ass with American ingenuity just as much as with might.
Hah, that was the first thing that came to my mind after post #4, too.
Heinlein, 1940
Had to look it up
I like it. Thanks for the reference. In the late 60’s I read a lot of Marvel comics, Doc Savage, Mad Magazine, Wells, Huxley and Orwell but not too much pure science fiction. :)
“However, let us not lose sight of the possibility that a barrel of oil produced from shale in the U.S., for example, might cost $200.
Were we to drill in ANWR, the cost of infrastructure and transport may cost the same.
The shale potential was discovered long ago and there was nothing to stop oil producers from reaping it. It must have been uneconomical.
The Alaska Pipeline was a huge expenditure and the oil we get through it was once the most expensive.”
I’ll let “thackney” respond.
And kicking ass is all in the sense of prevailing economically so that we can enjoy the best life worth living.
When WT was $20, North Slope was 1-2 dollar less. Of course WT is the best, so might have a built in premium all other things being equal.
So is time and space travel, only let someone else work out the details. I consider your plan completely impractical under present circumstances.
I am not aware of this German marvel that so impresses you. How may I learn about it?
True but will we produce?
You can lead the oil companies to water but you can't make them drill. I don't remember oil companies in their appearances before Congress testifying that they need to drill off-shore in order to increase production and reduce prices.
“Bottom line. The more product we produce domestically, the less product we have to import”
True but will we produce?
“You can lead the oil companies to water but you can’t make them drill. I don’t remember oil companies in their appearances before Congress testifying that they need to drill off-shore in order to increase production and reduce prices.”
I’ll let “thackney” respond since he is the expert in this field.
Put the offshore blocks up for bid. If the oil companies don’t bid on them (fat chance) you’ll have your answer.
It is a bubble, that it is a bubble is clear to everyone on the planet, that Iran and security fears are driving it, not mythical nonsense about China consuming more than countries five times its economic size, is also obvious.
It will go smash just like the real estate bubble before it, and the dotcom mania before that, and the junk bond mania before that, and the silver corner before that, and...
Enough, bubbles are eternal and they always pop.
Your system makes sense for the future - but I doubt we have the technology to efficiently pull it off now...
Some years before Walt Disney died - before Disney World and Epcot were created - Disney dealt with your issue. The original E (Experimental ) P (Prototype) C (City) of T (Tomorrow) (Epcot) had sidewalks like the ones you're talking about - people would move effortlessly from belts that moved at slightly faster speeds until they were moving 40 to 50 MPH through the domed city. The same could be done with cars or trucks. Too bad Disney died before he could realize his dream city - the only thing about the existing EPCOT and Disney's dream is the name.
With the likelihood of Israel hitting Iran’s nuclear facilities before the end of the year, I expect to see $150 a barrel oil before we see $100 a barrel oil.
“It will go smash just like the real estate bubble before it, and the dotcom mania before that, and the junk bond mania before that, and the silver corner before that”
We can’t run cars, trucks, planes & trains on RE,dot.com,junk bonds and silver...
and unless and until the supply of oil substantially exceeds the demand; the price will not dramatically fall.
Rechargeable hybrids can already get 100 mpg. Add nuclear power plants to supply the energy and we’ll go a long way towards cutting the demand for imported oil. That also keeps it private. No need to get the politicians involved.
I paid $3.65 today in Southeast Texas.
Estonia and Brazil have been producing petroleum from oil shale for more than a decade. It certainly was not costing $200 when crude oil could be bought on the open market. It is an economical method. The Exxon facility that closed was based upon government subsidies. After that ended they closed it. Then the US goverment changed the rules not allowing development to this day.
Were we to drill in ANWR, the cost of infrastructure and transport may cost the same.
The Alaska Pipeline was a huge expenditure and the oil we get through it was once the most expensive.
Just the opposite is true. The pipeline was a huge cost but the oil is sold on the market and the West Coast Demand yields a lower price than brought on the Gulf Coast. When the export ban was in place (until 1993) Alaska North Slope oil was often some of the cheapest in the world. Check the prices from 1986:
Alaska North Slope Wellhead Acquisition Price by First Purchasers
http://tonto.eia.doe.gov/dnav/pet/hist/f005071__3m.htm
I've sometimes wondered about designing trucks with hydraulically-operated railway-style wheels, running on tracks that are constructed to allow trucks to exit at any point (though in most places not at speed). Thus, trucks would gain the efficiency advantage of using steel wheels on steel rails, but maintain the ability to drive (albeit slowly) around obstructions. Conceptually, the system would share a bit with the trams of London (circa 1900), though obviously with a century worth of changes.
Don’t forget the original - the tulip bubble!
It would have been even better if it had detailed how we're making those cuts in oil use, and what China and other newly industrializing countries are doing with their share.
In particular, Americans are driving less out of necessity and will continue to do so. That will show up in probable bankruptcies among automakers, boat builders, and airline companies and air frame manufacturers.
Why would my real estate taxes increase more than the price of gas since 1980? I think the local gov has gone spend crazy and the Fed. Gov. has pulled the rug out from under big oil, so that our largest oil co. Mobil-Exxon is ranked 14th in the world and they control 5% of the world supply of oil. Our gov. run by the rats has wrecked the oil industry. I would not sell the farm to buy stocks in a industry that is about to be nationalized so we will be paying 10 bucks a gal.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.