CNNMoney.com reports that the price of oil has topped $100 a barrel, for the first time ever. (Happy New Year!) U.S. crude priced for delivery in February has gone up $4.02, to reach $100 a barrel on the New York Mercantile Exchange, Inc. (NYMEX). Ira Eckstein, president of Area International Trading Corporation, says you ain't seen nothin' yet: "This market is really gonna fly.” CNN lists several reasons for the rise, including civil unrest in Nigeria and rumors of a potential cessation of Mexican supply (no reason given). And then there's the ongoing decline of U.S. oil supplies. Oh, and a “surprise fall” in US manufacturing, which could lead to lower interest rates, which could further ding the value of the dollar, which could lead investors bail out of U.S. equities and into commodities, which would drive up the cost of imported crude. No mater how you slice it, gas prices are sure to arc upwards, putting yet more pressure on a beleaguered market for gas-hungry SUVs and pickups.
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And right when I’m about to buy a new sports car, too.
With all this bad economic news worldwide why is oil so expensive? If all hells breaking loose where is the demand coming from. Some have suggested governments are buying oil and stockpiling it in case of supply cutoffs. How they intend to market and sell government owned resources is anyone’s guess.
When demand drops worldwide the price will fall. Until then oil is not too expensive, it is market priced.
GS650G: With all this bad economic news worldwide why is oil so expensive? If all hells breaking loose where is the demand coming from.
According to the New York Times:
“The rise in oil prices in recent years has been driven by an unprecedented surge in demand from the United States, China and other Asian and Middle Eastern countries.
Oil markets have become increasingly volatile and unpredictable, with large swings in 2007 that analysts attributed partly to financial speculation, not just market fundamentals.
Political tensions in the Middle East, where more than two-thirds of the world’s proven oil reserves are located, have also fueled the rise in prices.”
To put $100 oil in perspective:
“Oil is now within reach of its historic inflation-adjusted high reached in April 1980 in the aftermath of the Iranian revolution when oil prices jumped to the equivalent of $102.81 a barrel in today’s money.”
Possible reasons for the rumors of cessation of Mexican (Pemex) supply:
PEMEX announced last week that Mexico’s production for the first 11 months of this year averaged 3.09 million barrels per day, down 188,000 b/d from the same period last year and from a peak of 3.38 million b/d in 2004. Production in November was 2.9 million b/d and output from the Cantarell oil field dropped to 1.3 million b/d from a high of over 2 million three years ago.
Cantarell was the second or third largest oil field in the world. (Kuwait’s Burgan was about the same size). Cantarell peaked in 2004 and has gone into a steep decline. (Burgan also peaked recently, helped along by Saddam Hussein dumping much of it into the Gulf.)
Mexico’s Energy Minister said recently that PEMEX’s average daily production will drop by 1 million barrels to 2.1 million barrels within nine years unless Mexico’s Congress changes laws to give the company more independence and allow more private investment in the oil industry. A drop of this magnitude, coupled with increasing domestic consumption, would largely eliminate exports. Oil now accounts for 16 percent of Mexico’s export revenues and provides 40 percent of the Federal budget.
IOW they’re facing the loss of their cash cow. Mexico will need to keep whatever oil is left for themselves, and the aristocracy wants more freedom to skim off the top.
http://www.energybulletin.net/38629.html
Folks who are interested should read the November 2007 New Yorker article about the exploitation of marginal, but large, oil reserves. Expensive oil has made processes like the extraction of Albertan tar and coal-to-diesel much more economically feasible. When these technologies, combined with the exploitation of the new Gulf of Mexico reserves, come fully online in the next few years, the world price of oil should begin to creep downwards. OPEC is living large now, but not for long.
Glenn Swanson,
Thanks for the perspective on today’s oil cost relative to the inflation adjusted high in 1980.
I haven’t read the New Yorker article. Do you have a link?
The problem with the tar is that you need high heat to turn it into (synthetic) oil. So far they’ve found enough natural gas nearby to provide the heat.
My understanding is that those new deepwater Gulf of Mexico reserves (Jack2, et al) may produce 400,000 barrels per day – not nearly enough to make up for the decline of Cantarell.
With the exception of some short term dips, oil is never going to get cheaper. Evidence suggests that conventional oil resources have already peaked, and the non-conventional sources are not recoverable in such a manner that lowered prices will result. The trendline will continue upwards, unless demand collapses. Of course, demand collapse of that magnitude means that the shit will have well and truly hit the fan.
Donal: I haven’t read the New Yorker article. Do you have a link?
I’m not sure if this is the entire article, but it is all I could find:
http://www.newyorker.com/reporting/2007/11/12/071112fa_fact_kolbert
Okay. So you are now king of an oil producing country (alternatively, you and your buds run a democratic country with centralised control of some industries including oil).
You can spend more to pump more, or pump less, and make more as the price rises. Which do you choose?
Is it big oil, or big government behind higher oil prices. You decide.
$100 oil is the result of Peak Oil. The world is facing an unprecedented situation. Google Hubbert’s Peak, Peak Oil, Export Land Model. The future is not bright for the auto industry unless changes are made quickly. Some will surely fail and it may not be just those being covered in death watches and suicide watch. I expect oil to continue to rise during 2008 unless there is a deep recession worldwide, in which case the American 2.8 will still be gasping for breath. One or more may finally bite the dust.
Landcrusher :
January 2nd, 2008 at 6:30 pm
Okay. So you are now king of an oil producing country (alternatively, you and your buds run a democratic country with centralised control of some industries including oil).
You can spend more to pump more, or pump less, and make more as the price rises. Which do you choose?
Is it big oil, or big government behind higher oil prices. You decide.
That all depends on how fast and how much you think the price of oil will rise in the future and how much cash you need now for your nuclear bomb, I mean power, program.
Is it big oil, or big government behind higher oil prices. You decide.
No, it is us. We buy pick ups (then we just drive them around empty) and we buy SUVs (so we can act like bullies).
Stop trying to find someone to blame. We are to blame. Just look in the mirror to see who is responsible for oil prices.
There is another issue (besides price) going on in the oil business. No one really knows how much oil there is. The OPEC members lie to each other about their reserves because the more reserves they have (or claim) the higher export quota they are allowed. Because of all the lying there is no way to know if Saudi Arabia or Mexico or Argentina has another 2 weeks of oil or another 2 centuries of oil. This was written up in the Atlantic Magazine a few years ago.
No, it is us. We buy pick ups (then we just drive them around empty) and we buy SUVs (so we can act like bullies).
Stop trying to find someone to blame. We are to blame. Just look in the mirror to see who is responsible for oil prices.
Absolutely! I have predicted this whole scenario ever since big pickups and SUVs became “all the rage” (primarily by people who don’t use them for anything but a passenger car).
John
97escort: $100 oil is the result of Peak Oil.
I’ve heard the idea expressed better as, “Energy Uncertainty.” If one knew Peak Oil was here, and would have certain effects forthwith, one might be able to take reasonable steps to prepare. But if I am years too early, my wife and family could think me crazy. If I am years too late, we might all freeze or be killed in riots.
I don’t know why GM, Ford and Chrysler should be caught with their pants down. In 1972, operating a car business without a decent share of small cars in the mix was excusable.
Today, it’s not. We’ve had oil shocks again and again plus a steady upward creep in consumption and this leads to trouble for carmakers heavily dependent on big iron. $100/bbl oil was entirely predictable. It might have happened later or sooner but it was always inevitable. And as the price of oil rises, consumers are, finally, going to shy away from big vehicles.
And it galls me no end to see them wrap themselves in the flag as they push big iron, when energy dependence is a huge problem for our foreign policy.
David Holzman: Glenn Swanson, Thanks for the perspective on today’s oil cost relative to the inflation adjusted high in 1980.
Credit the NY Times for that perspective, but thank you for the kind words, David. :-)
97escort:
With the exception of some short term dips, oil is never going to get cheaper. Evidence suggests that conventional oil resources have already peaked, and the non-conventional sources are not recoverable in such a manner that lowered prices will result. The trendline will continue upwards, unless demand collapses. Of course, demand collapse of that magnitude means that the shit will have well and truly hit the fan.
Oil has been supposedly running out for decades – and we keep discovering more or better extraction methods. The vast majority of economists think we’ll always have oil. Of course, if people make choices via their elected reps (or dictatorial governments choose) to limit oil exploration/investment/refining, supply will languish & the price will climb.
However, based on the past 40 years, predicting future oil prices is very risky.
An interesting link:
http://www.wtrg.com/prices.htm
Oil has been supposedly running out for decades – and yet more is continually found and extracted.
Those predicting peak oil assume that current upward price pressures will always persist. And there are governments’ choices (both from elected representatives and dictatorial fiat) that keep prices high. But assuming they’ll stay that way is risky. The vast majority of economists consider peak oil a myth (although expensive oil may not be).
An interesting link:
http://www.wtrg.com/prices.htm
Atlantic Monthly? OMG. Please consider the source.
I live in Houston, TX (the energy capital of the US, if not the world). I recently lived in Calgary, AB (the energy capital of Canada). I know lots of people in the oil business, people who find oil, own oil, produce oil, and trade oil. If we were any where near peak oil, they would know. They would also be all over the place telling everyone. You know why? Because they would all become billionaires in no time! Do the math. Give it up. We ain’t there yet.
I am not blaming anyone for oil prices. I am just trying to get people to think about the supply side for, I don’t know, half a frigging millisecond before they start believing a bunch of idiots who know NOTHING about oil. There are no big conspiracies or apocalyptic scenarios going on. There are just individuals, and governments, and businesses doing what they do. There may be some little conspiracies, or little geological mysteries, but nothing earht shattering.
On the demand side, the US has always sucked down too much fuel. Ok, but the huge demand changes have been in Asia. Not your neighbor’s garage. Get over it. You would be more correct if you blamed them for the price of caviar than oil. You could be in the ballpark if you blame them for the price of gasoline but not oil.
Oh, and all my neighbors are either bullies, or they just want to get their families and stuff around in a flat swamp that can flood in less than 5 minutes and kill you. Let me think about which is more likely…
It’s a sweet coincidence. I’ll remember today as doubly historic, because it was also the day when my new home solar electric system was installed. One small step for a homeowner, one tiny leap for mankind…
This problem has nothing to do with growing demands in US or Asia or any other place. I’ve seem as many cars out on the street today as 15-20 years ago. The truth is that the people that is running all these oil refineries just got a little smarter when it comes to oil production and pricing…..and heres a thought, pretty soon alot of the baby boomers will soon retire this will lead to a decrease in driving activity, so lets wait and see if the price goes up or down…so stop pointing fingers at each other.
I believe the best energy policy for America is a continuation of current energy policy; that would be no credible mandatory fleet MPG requirement.
I would even advocate tax deductions for new gas guzzler purchases. (A Chevy suburban gets the most, something like $10,000; a 6 cyl Accord gets the least, something like $1,000.) This should allow the D 2.8 to continue to operate with excess capacity of the wrong types of vehicles, with money losing incentives to move the metal.
The longer we can keep people commuting in gas guzzlers, the faster we get to $6 gas.
With $6 gas, most commuters switch to 4 cyl diesel hybrids that get 100 MPG, and the only people driving to church on Sundays in a guzzler are the truly wealthy CEOs, not the pretentiously credit card wealthy doctors and lawyers.
So to break Americans from their ‘God-given, God-guaranteed right to waste oil’ mindset, they must first waste it feverishly.
I am very serious.
casper: the oil refineries buy crude oil and refine it into other products such as gasoline, diesel, kerosene, etc. They often have nothing at all to do with oil recovery, exploration or pricing.
I believe your argument would be appropriate if the discussion were about gasoline prices, however.
ihatetrees: you are willing to ignore geologists and believe that economists are the authorities of record when it comes to the amount of oil that is available? The average economist is clueless: they work with idealized models of economic behaviour. The typical economic model assumes that infinite economic growth is possible and desirable (I won’t argue with desirable, but the earth and its resources are finite and will collapse under demand long before we have the capability of expanding at a large scale into space).
Landcrusher: nobody I has ever read suggests there is some big industry/government conspiracy about peak oil. It is mere head-in-the sand ignorance, or pollyanna cornucopian-ism.
The point with peak oil is not that we’re running out. There is still a shite-load of oil in the ground. The point is that when you hit the downside of the production peak, and the supply and demand curves begin to diverge, you will get a steady and inexorable rise in the price of oil. No conspiracy, just simple microeconomics. Since our society is built on cheap oil (and energy in general) something will have to give. Either society will fall (the apocalyptic scenario you refer to) or we re-arrange our society and way of living based on expensive energy. And yes, new oil fields will be discovered, and new methods of extraction developed, but we will not see cheap energy again.
If we keep denying that we are in an age of increasingly expensive energy, then we will not do anything about it until too late. The longer we wait, the more likely the apocalyptic scenario is to play out.
Since our society is built on cheap oil (and energy in general) something will have to give. Either society will fall (the apocalyptic scenario you refer to) or we re-arrange our society and way of living based on expensive energy.
Who says our society is built on cheap oil? Not so long ago, some argued that the Brittish empire was built on slavery, and outlawing it would be disasterous.
Oil prices over the last seven years have quadrupled. Society has not come to a screething halt. I bet another doubling of oil prices won’t do it either, though it would start affecting behaviour in ways that might reduce consumption.
I guess we’ll know two years from now…