Posted on 07/31/2005 2:06:30 PM PDT by Jomini
The daily or weekly fluctuations in the price of a barrel of crude oil on the New York market are due to a multitude of factors of very different origin and bearing.
Commentators usually cite OPEC output, the state of American commercial stocks, the weather, speculators, terrorism, weakness in refinery capacity, the situation in Iraq, in Iran, in Nigeria, in Venezuela, in Russia ...
But these "explanations" appear valid whatever the level of the barrel price - 30 dollars, 40 dollars, 50 dollars... - while we lack the principal explanation for the level itself, today 60 dollars. Three decisive factors are pushing the price of crude up permanently: the geological depletion of conventional oil (inexpensive to extract), the entry into a world of terrorism and of permanent wars for the control of oil, the strong increase in demand due to Asian growth and the maintenance of Western consumption. It's traders' anticipation of this last factor that heats up the price today.
During the first century and a half of the oil era - from 1859 to 2004 - global demand was always satisfied by the supply. You wanted more oil? We had margins of maneuver. We would open up the spigots. More flowed out. We sold more.
The oil shocks of yesterday were political, not economic. Today, while average global demand in 2005 will border on 84 million barrels a day (Mb/d), the room for maneuver on the supply side is practically non-existent.
All the spigots are delivering at their maximum capacity, at the limit of demand and at the risk that an event (strike, sabotage, local conflict) reduce supply. A situation of relative shortage results, pushing prices higher.
As long as the supply does not satisfy demand, the price of oil will increase until a sufficient number of consumers - there are billions of them! - adjust their consumption to the possibilities of their budget. If global supply reaches the limit of 84 million barrels a day (Mb/d), prices will stabilize at the level necessary for consumption not to exceed those 84 Mb/d. And when geologic depletion accentuates, the absolute decline in global supply will take place at a rate of at least 2% a year. Prices will then have a tendency to increase still more to exclude more consumers and reduce consumption.
However, the long oil-dependency of many countries makes me think that demand will remain strong for vital reasons. The pursuit of growth and the increase in global population will continue to feed an increase in demand along the order of 1.5% a year. In fact, statistics show that oil demand is relatively price-inelastic (unlike demand for strawberries). In other words, it's not because prices will increase that demand will decrease.
In 2004, demand grew more than 3.5%, or 2.7 Mb/d - the biggest increase in twenty-five years - while the average price for a barrel of oil went from 26 dollars in 2002 to 31 dollars in 2003 and 41 dollars en 2004. From the beginning of 1999 up to the end of 2004, the price of crude increased 350% and demand 10%, contrary to all predictions. This phenomenon could almost be called reverse inelasticity: demand grows while prices increase. Nonetheless, this surprising "rule" only obtains up to a certain level of prices, for a moderate speed of increase and over a limited period of high prices.
Another conventional and false belief postulates that high oil prices slow the economy down. The contrary may be observed: rather high prices tend to push global growth, which in 2004 was at its strongest in fifteen years. In effect, while the price of the barrel rises, considerable volumes of petrodollars received by the oil companies, both the private ones and especially the nationalized ones, are recycled into purchases of raw materials, finished products, or agricultural commodities from countries exporting those goods, which are different from the oil-exporting countries. Global commerce grows, involving even certain poor countries which rapidly transform the proceeds from their sales of raw materials into purchase of the manufactured goods they lack. These countries do not save and possess a strong marginal propensity to consume. Any supplementary revenue is converted into imports of what they don't have.
This schema applied to the little Asiatic dragons, Singapore, South Korea, and Taiwan during the 1970s, when oil prices went up by over 400% between 1973 and 1981. Today it corresponds to the boom in China, India, Pakistan, and Brazil. Global oil demand is therefore only slightly linked to the level of crude prices in New York - up to a certain level and up to a certain speed of increase, at any rate.
An oil shock can, with a time-lag, provoke a slowdown or a recession in one region of the world and simultaneously stimulate the economy in another region. It's globalization as a planetary dynamic that counts, not the energy savings of some Northern countries, cancelled out by the energy voracity of some emerging countries. In total, a transfer of Northern countries' energy-intensive activities to emerging countries joins an increase in global merchandise traffic to increase total energy consumption. The so-called post-industrial "knowledge economies" of the OECD rest on a massive transfer of their material and energetic foundations to "emerging economies."
If prices continue to rise fast for underlying reasons, at 70 or 80 dollars a barrel it is likely that the inflationary consequences of the oil price rise will be sufficiently marked for the central bank governors of rich and oil-voracious countries - North America, Japan, and the European Union - to raise interest rates in an attempt to contain inflation.
That remedy will only increase the pain, reactivating the pain we already experienced during the second oil shock of 1979-1983, under the ultra-liberal impetus of Margaret Thatcher and Ronald Reagan. In fact, when the cost of money increases, financial markets contract and businesses have more difficulty financing themselves on the Stock Exchange or loan markets, which slows down economic activity. When money is more expensive, everything becomes more expensive, and inflation increases.
When they attempt to arrest it by a second method, banks print more money, which provokes the opposite result: more inflation. Consequently, the method of raising interest rates, supposed to fight inflation, on the contrary, brings about the contraction of financial markets, inflation in the cost of money, then of other prices, the destruction of employment and business difficulties.
Oil is less a final product than a factor of production, often a small factor in total cost. The consequence of this is that, for the moment, there are few incentives to substitute for oil or to reduce demand. Even climatic change and its lethal effects have not dissuaded the buyer of a 4x4 whose grandmother died in the summer 2003 heat wave.
This relative rigidity will aggravate the seriousness of the economic and social consequences of the triple shock that is on the way. Since no one is prepared, it will be grave. Because, this time, there will be no long return to a reduction in prices, to low-priced oil products. Inflation is likely to be severe, the recession also.
What I am talking about here is not "the end of oil," but "the end of cheap oil." That, alas, will be enough to provoke enormous economic and social instabilities, to dislocate political powers, and to provoke wars. The misfortune is that, in spite of the warnings shouted out by some, political and economic leaders have not at all anticipated the coming situation, as is demonstrated by the undeserving proposed law on energy orientation adopted by the National Assembly Wednesday June 23. The shock is inevitable. There is no plan B. There is only a half-solution - immediate sobriety - to reduce the devastating impacts of the shock by pushing back a little its inevitable arrival.
The 84Mb/d demand figure seems to be the current number in vogue now for fourth quarter projections. At this level any disruption in the supply chain will spike the price. This scenario is a Jihadist's dream. Why fight the powerful armies of the West with RPGs and IEDs when their support structure can be collapsed like a house of cards with a nonlinear assault strategy based on creating the "Third Oil Shock?"
The price of oil is going to go through the roof and in this case it seems Bloodhound Gang was eerily prescient. Time for the West to go on the attack or slowly choke on its own economic blood.
J
bookmark
Left-wing blather.
1. There is plenty of oil, even in the US, but environmental regualations prevent its use.
2. There is enough coal in the US to last 600 years.
3. The biggest problem is lack of refining capacity, also the result of environmentatlists.
4. Even if oil is running out, the price must go up to justify alternatives. The market is always the best controller of resources.
5. If and when the Chinese economy collapses, that will be the end of the story.
LOL. Wait until the oil producers want payment in other than $US. Then the fertilizer will really hit the fan!
It ought to be easy to chart this number over time, as well as the demand. It gets the Peak Oil skeptics tizzified that there is such a number.
There is evidently enough refining capacity. Keeping excess refining capacity sitting idle is a drag on the bottom line.
The Energy Bill passed!!!
Does anyone know when it will be signed into law?
It doesn't provide any energy, although it will energize some bank accounts.
How about a nice game of neutron bomb war?
Like Enron, when they collapse it will all become public.
I already made investments (likely uneconomic, but I was annoyed by the prices and where much of the $ go) to cut personal transportation consumption in half. Others will follow. Supply will increase, demand will drop or not climb as fast, and prices will likely eventually fall.
It does a lot of things over time to help out the Energy situation.
Building atomic energy plants.
Getting gas pipelines from Canada.
Modernizing the Grid.
Research into clean coal technology.
ETc.
May not make much of a mark in the history books but when it comes to the impact made on the common man (us) this giant leap in the cost of gas and diesel is a great great part of the legacy of George Bush.
I support the war in Iraq because I think it was necessary for the US to project massive force into Central Asia. We cannot let the islamofascists cut us off from our life's blood.
But giving up my deisel Dodge Ram extended cab will forever give me a sour taste in my mouth. Thank you George Bush for making it possible for the invirowhackos to take my beloved truck from me. You did it single handedly.
Greasing the chutes for atomic power plants is a plus. The problem will hit before any of them come online. It is too late, although we have to start from wherever we are; there was plenty of warning between 1973 and now; in 1973 we could still have saved ourselves.
Overwrought, much?
Every dollar increase in the price of oil makes alternatives that much more affordable. All free markets are self-correcting.
And we have enough to last at least 200 years.
So9
That is a common fallacy. The alternatives are not more affordable; they cost more.
you are wrong there is not enough refining capacity the last major refinery was built in the 70s - and they are operating at full tilt - we are going to get screwed if we dont embark on a manhatten style project and quit F n around
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.