The price of oil continues to set records – it’s now reached nearly $126 US Dollars. While some of that can be attributed to the Pacific Peso-ization of the greenback, by most measures the oil price has reached a record. Against the Euro, it’s still a record. Inflation-adjusted, it’s still a record.
But there’s still one measure by which the oil price isn’t a record – against the purchasing power of the average Western consumer, apparently. According to today’s Fin, it would have to reach somewhere around $135 per barrel to match the peak price of oil by that measure. But it seems like there’s every possibility it might continue to go up in the short term. Indeed, some guy from Goldman Sachs is predicting that oil will reach $200 per barrel in a few months’ time.
But it’s interesting to see what kind of responses to the increasing prices we’re seeing, particularly in terms of long-term investments. As a companion piece to the earlier story about the declining sales of Yank Tanks (full-size four-wheel-drives and utes in the US market), we have plummeting resale values and extended periods on used-car dealer floors. In the aviation world, too, there are changes. The 50-seat regional jet – a staple of flying in the USA, where a combination of regulations and labour agreements with unions used to make them comparatively cheap to run compared to a full-size airliner – appears to be on its way out, as the fuel costs are making them uneconomic.
But there are a couple of other areas where you’d particularly expect to see responses to higher fuel prices, and I haven’t seen any great evidence of it yet. The first is from the freight industry, particularly the trucking industry. While the Australian Trucking Association likes complaining about fuel tax on a regular basis, there doesn’t seem to be any particular stampede to more efficient technology. The first hybrid truck appeared on the Australian market last year – from, surprise surprise, Toyota’s truck division Hino. But the supply is tiny so far. The other obvious alternative fuel for heavy vehicles is natural gas, which is widely used in Australia for buses but not, at this stage, for trucks – and there doesn’t appear to be any signs of a mass shift.
The other thing that you’d be looking for is announcements about alternatives to oil. And there are some technologies around. You can convert coal or natural gas into liquid fuel. There are large amounts of oil shale in Australia, which can be turned into oil. All of them are expensive – something that killed a Queensland shale oil project a few years ago, not to mention environmentally dubious. But despite continued talk of a GTL plant in Western Australia, and various small-capitalization stocks touting GTL prospects to investors, there hasn’t yet been any commitment to actually spend substantial cash building anything.
Maybe it’s just that investors are dumb. But, at least over the medium term, I don’t see much evidence that people are putting their money where the peak oil noise is when it comes to oil prices. They appear to be betting that it’s coming back down again – either through demand reduction, and/or oil production increasing from conventional sources. And it’s going to come down to level where these alternatives are uneconomic. And whatever that level is, it’s not $200 a barrel oil.
Yep all of that plus believing in the magical oil fairy, but the reason there is no activity is that there are no substantial alternatives, get over that possibility and then we might start to get somewhere in rearranging our thinking along more realistic lines and seriously planning for the post oil future.
I’m not saying get a bicycle, though you probably should, but I think that it’s time folks started looking around for more efficient living arrangements, live much closer to work, use public transport, sell the second and third car……or better yet all of them…..etc. Though IMHO that’s unlikely to help much.
For a laugh have a look at the history of ABARE’s prediction of oil prices
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Phil: but there are alternatives, even if they’re bad ones.
You can run trucks and buses off natural gas quite happily, for instance. And while we’ll run out of gas eventually, not even the pessimists seem to think Peak Gas is anywhere near as close as Peak Oil.
But there doesn’t seem to be a huge amount of interest in running trucks (except for local buses and garbage trucks) off CNG yet.
I’m not saying get a bicycle, though you probably should, but I think that it’s time folks started looking around for more efficient living arrangements, live much closer to work, use public transport, sell the second and third car……or better yet all of them…..etc. Though IMHO that’s unlikely to help much.
It’s sometimes not that easy living close to work. Because of my wife’s job (and late working hours), we need to live in the West End / Highgate Hill area; we don’t own cars. Unfortunately, the rents are high in this area and stinking. We’re fortunate than most – no dependents, so we can choose smaller premises – and workplaces that are actually accessible by public transport. I feel sorry for the poor saps who have to work at some industrial estate at Narangba or Richlands.
Public Transport is also vulnerable to peak oil:
If petrol has to be rationed in a future oil shock, then it will be essential to ration access to public transport as well. No Australian city has anywhere near enough public transport capacity to handle even a quarter of existing car travellers if they need to use buses and trains instead. Elderly people, those with disabilities, mothers with young children and people with essential jobs, such as those working in hospitals, should be given priority access to the limited public transport.
Not to mention the places where public transport relies on gasolene to go. At least Brisbane is luckier than most – CNG for buses, and electricity from hydro/coal. But the real problem is that Australian cities are so incredibly sprawling – 2.3 million spread over 150 km from Tweed Heads to Caboolture, for example. To get the most out of public transport, it’s gotta compress somehow.
One alternative that the oil majors are putting lots of money into is the Canadian oil sands. There’s also a lot of money going into GTL in Qatar.
Apparently the prop-plane is making a comeback:
High Gas Prices Aid Prop-Plane Comeback
However, I think its likely the world economy (the developed world at least) can sustain much higher oil prices than $125/bbl before we see any demand destruction. We’ll pay through the nose for the stuff, and if there really is a problem with supply the sky’s the limit for oil.
I’ll try that again…
Gas has peaked in the U.S. and the North Sea, and one way to get to Peak Gas a hell of a lot faster is to replace 85 million barrels of oil a day with natural gas.
I’m not sure what Plan B is for the world as a whole, but here in Australia its CTL, and to hell with the climate change consequences. Martin “Marn” Ferguson certainly seems to think so…
Its been almost two weeks since Marn mentioned CTL. We must be due.
I’m not a huge fan of Kunstler (he’s a bit too dark even for me) but he has come up with some great quotes…
Robert I’d say that smart investors aren’t interested in oil shale because they know that any sort of carbon tax will kill it stone dead. Dumb investors aren’t interested because they think the price of oil is coming back down soon.
One final comment:
We’re not making anything like the investments we need to combat climate change either, does that make climate change any less real?
Carbonsink: there’s a big difference. Switching to cheaper options, or making an alternative supply of fuel available, goes straight to either the producer or the consumer’s pocket.
Global warming, by contrast, presents every incentive to let other people do the work of reducing their emissions. I forget who described it as the ultimate example of the free rider problem, but they were pretty right.
Robert, why do you say oil is not going to $200 per barrel? What gives you confidence that you know which way supply/demand curve for oil is moving?
Have you been surprised by the 500% increase in the oil price over the last ten years? If you were not surprised then you should be able to explain why this steep trajectory has now finished.
As there are only bad substitutes for oil, and there are no super oil fields left to discover, you seem to be predicting a lessening in per capita demand?
wbb: I don’t.
I’m merely noting that I’m looking for responses that indicate that people making investment decisions believe that oil prices will continue to increase, and, largely, not seeing them.
Maybe I’m looking in the wrong place for evidence. Maybe the market’s getting things badly wrong. I’m just noting that I don’t see that much evidence of massive investment decisions based on continued sky-high oil prices. Make of that what you will.
At the moment the oil futures market is predicting that the price of oil will stay approximately the same at least until December 2016. So if oil hits $200 a barrel then investors are dumb…
How so? An investor in alternative fuels would do so believing the market will push oil prices higher. An investor in low carbon energy would do so believing the government will push the price of carbon-intensive energy higher. Whether its the market or the government, the producer still profits. Are you saying you don’t trust the government? Yegads!
Besides, the massive ongoing investment in the Canadian oil sands provides ample evidence that the oil majors believe oil produced this way will be profitable in the long term.
Let me get this straight: Investors are betting that oil prices will come down, because of demand reduction. Really?! What pray tell will cause this demand “reduction” other than high oil prices? A mass spontaneous move to electric vehicles perhaps? The imminent release of the hydrogen powered Hummer? Didn’t I just read today that new passenger car sales in China climbed 17.84% in the first four months of 2008.
And when you say production increasing from “conventional sources”, do you mean on-shore, stick a hole in the ground and it comes gushing out, conventional? I think you’d be hard pressed to find anyone these days who believes conventional oil is going to increase over the next 5-10 years. Ultra-deep offshore yes, oil sands yes, biofuels maybe, but super cheap conventional oil, no. The only realistic chance of that happening is if Iraq settles down and the international oil companies are allowed in to develop Iraq’s reserves.
You really need to read the Mackay Daily Mercury if you want to stay up to date. The company is called Queensland Energy Resources, but I think it is really the Ziff Bros of new York, otherwise known as Sandefer Capital Partners who bought what was left of Southern Pacific Petroleum of the Rundle failed venture.
I’m not sure where this mob are up to, but they are looking further north, I think.
The other day I heard that Estonia has more shale oil than anywhere, but were worried that joining the EU might prevent them from developing it fully.
Also South Africa are big on coal to oil, aren’t they?
Fair enough. I suppose my point is that the level of seriousness about CTL and GTL is somewhat less than you’d expect, assuming that oil prices are going to continue to rise. The costs of exploiting oil sands (ignoring the environmental impact) are also rather lower than current prices, making them very, very profitable right now.
Brian, Estonia is indeed big into oil shale, and they’re already EU members. At some point these two facts are going to collide. Estonia has no other natural resources to speak of, but they’ve done extremely well out of joining the EU – Tallinn is transforming itself into a modern Scandinavian capital virtually overnight. How those two things will play themselves out – your guess is as good as mine.
Robert, the item I heard about Estonia was from the BBC via Newsradio. It was couched in terms of the EU membership being a huge negative re shale oil balanced against the other positives. I guess they went in with open eyes.
I’m worried about shale oil in Qld and what the Bligh Govt might approve to avoid compensation payments.
There was a guru on Lateline last night (don’t have time to look it up) who said that peak oil is probably now and the price has only one way to go from here.
Marn seems pretty serious about CTL and GTL and he is the Minister for Resources and Energy after all (horrifying thought as that is).
Have a look at Shell’s Major Projects. There are nine listed. One is in the oil sands, one is Pearl GTL (the largest in the world), a few ultra deep water projects, some LNG and a few big refineries.
No conventional oil.
That was Richard Heinberg who is definitely on the doomerish end of the peak oil spectrum. What was surprising is not what Heinberg said, but the fact he was being taken seriously in the mainstream media. A couple of years ago he was addressing peak oil conferences in Sydney with half a dozen attendees.
carbonsink, I have a hunch that Penny Wong is there in an ueber portfolio so that Rudd himself doesn’t need to arbitrate between Marn and Garrett.
Peter Wood wrote:
Not necessarily dumb. The futures price isn’t a prediction, it’s a hedge. That is, it’s supposed to represent a value at where the purchaser of the futures contract can cover his costs. There’s no point in buying a (very expensive) futures contract that represents a much higher price – for starters, you’ve got to find someone to sell you one (and who would?). There’s been a fair bit of talk that the current oil price is driven by speculation – but what the futures market really says is not that the speculators are predicting oil will remain steady to 2016, it says that the producers need $125 a barrel to cover their costs.
(Grrr … how about an edit button at LP, because the preview really doesn’t work)
Oh there’s absolutely no doubt Wong has been installed to stop anything ‘radical’ happening with climate change, like, er, actually doing something about it.
While I think of it, two more reasons why oil the demand-supply situation will continue to tighten in coming years:
1. Petrol and diesel are heavily subsidised in many emerging economies (Malaysia, Indonesia, China) and oil exporting countries (Venezuela 12c/gallon, Iran 40c/gallon, Saudi Arabia 45c/gallon, Libya 50c/gallon – CNN: Where gasoline is cheapest.
So demand will continue to grow strongly in these countries while the subsidies remain in place.
2. Like Australia, oil exporting countries have benefited from a huge surge in national income from oil exports, except the increase has been much greater relative to the size of their economies. Unsurprisingly many of these economies are growing very rapidly (especially Saudi Arabia and the Gulf states) and they are consuming ever increasing amounts of heavily-subsidised oil. The problem is, increased domestic consumption means less oil is available for export, so total amount of oil on global export markets grows more slowly (or shrinks faster) than total global production. This idea is encapsulated by the Export Land Model.
This thread is remarkably like one just concluded at John Quiggin (with an unusual amount of snark from oil peakers).
Indeed, wilful. Peak oilers were particularly snarky on that thread.
Snarky, moi?
It comes from no-one taking the problem seriously for a decade. 2008 for peak oilers is like 2006 for climate change in Australia. People are waking up and at least thinking about the issue.
If a bit of snark stirs that up, and sharpens your peak oil ‘debunking’ arguments, I think that’s a good thing.
No I just think that snark directed to Prof Quiggin is particularly misdirected.
I think ProfQ is big enough and ugly enough to cope with the odd bit of snark from some anonymous nobody blog commenter.
Look, that Club of Rome thread was dying from disinterest while the culture warriors went into battle over Howard’s core/non-core promises (yawn). A bit of snark and some wild exaggeration got it going again.
I’d probably agree with ProfQ and Robert Merkel about 99% of energy and climate change issues, but furious agreement is rather dull. One point of disagreement is the costs of mitigating climate change. ProfQ has often claimed that it will cost 2 or 3% of GDP over 40 years which common sense tells you is b*ll*cks. If it was so cheap and easy, why aren’t we doing it?
Anyway, I think got a bit off track there…
Based on the “economic law” of supply and demand, the price of oil (and therefore petrol) will continue to increase.
I can imagine that $2.00 per litre could be reached by the end of 2009, and $5.00 per litre is possible by 2012.
When will it reach $10.00 a litre, perhaps by 2020?
What are our fearless politicians doing about it? Not much; still building freeways and offering diesel fuel rebates to road transport. Nothing in the federal budget for public transport or bicycle paths . . .
It seems we actually have to run out before these snoozers will do something.
I’m getting increasingly clear signals that biodiesel from waste (NOT food) is a goer in the next few years. I have a report in front of me that reckons 8% of Victoria’s diesel consumption can be supplied at a price of $50/barrel by 2016. No real issues from feedstock. This is a far more advanced proposal than you might think.
wilful: can you say what process they’re proposing? Gasification to FT synthesis, something like Choren?
Robert, I don’t understand any of it, so I’m going to quote some technical words at you out of context: levulinic acid, ethyl levulinate, furfural. Done at 1 ATM, 350 C.
wilful – I’m getting clear signals that biofuel is a crock.
Natural Fuel (NFL). Floated in late 2006 at $1.50 – now $0.10
Australian Renewable Fuels (ARW). Floated March, 2005 at $1 – now $0.048
Australian Biodiesel Group (ABJ). Floated late 2005 at $1 – now $0.13
The reason is that the energy and feedstock required to produce the fuel outweighs the return. While oil remains cheap – biofuel is, at best, a sleeper.
wbb, I know all that (I had money in the Darwin one), and the report I’ve got dismisses those failures as ‘first generation’, then goes on to say just how good their model is. One of the key issues is just transporting the bulk fuel to the refinery – so a number of distributed ones around Victoria are planned. And they’re confident of the $50 a barrel production cost.
wilful: I’d love to see a copy of that report…but second-generation biofuels have been promising much but delivering little for a while now. I know that there are LP contributors who reckon many of the technical issues are solved, but there aren’t too many decent-scale plants in production to point to.