Earlier this year, the price of energy, particularly oil, was one of the biggest issues in world politics, and particularly American politics (climate change has always been a second-order issue there). The spike in the oil price drew mainstream media attention to a theory that had been doing the rounds of the blogosphere – and, later on, the mainstream media – Peak Oil. To recap, the Peak Oil hypothesis states that the level of world oil production will reach an absolute peak, and then start to decline, on a fairly rapid basis. The consequences? Some time in the not too distant future, oil at $1000 a barrel (equivalently, petrol at $10 a litre), dire economic consequences to the point of food shortages, and, amongst some of the wilder fringes of its adherents, even the collapse of modern civilization.
When oil reached $150 per barrel, peak oil proponents were suddenly popping up on Lateline and its equivalents on a fairly regular basis. But, just as suddenly, they disappeared, to be replaced by the heralds of the subprime crisis. If nothing else, it demonstrates the inevitably limited attention span of the mainstream media. But it’s worth considering what the events of the past few months mean for peak oil, both the hypothesis itself and the predictions of dire consequences.
Obviously, the global financial crisis has no bearing on the amount of oil trapped beneath the Earth’s surface. Nor did technological breakthroughs in oil extraction suddenly radically increase the percentage of oil recoverable from oil wells, or reveal huge new oil fields (or their equivalent) available for cheap exploitation. Instead, like virtually every other traded commodity, the price has gone through the floor because of a general recession reducing demand. But recessions, even deep ones, end eventually (at least, I sure hope they do), and economic output exceeds its former peak sooner or later – perhaps a decade or so, even in the case of something akin to the Great Depression. Present economic conditions are not going to fundamentally alter the peak oil equation.
But then, if the huge drop in oil prices doesn’t tell us much about peak oil, did the price spike of 2008 tell us anything either? In hindsight, not a great deal. Commodities from anthracite coal to zinc, and notably including renewable commodities like beef, milk, and wheat, all underwent similar price spikes. Iron is one of the commonest elements on Earth, but that didn’t stop iron ore going up, and going down in price just as suddenly.
However, it does seem to me that we’ve learned a few things about the effects of commodity prices in the last few months. The massive spike in commodity prices didn’t bring down the US economy – or, at least, I’ve not seen any commentary that identifies the commodity spike as a significant contributing factor. It took a much more powerful force – the world’s credit system gumming up through the usual combination of contagious greed and contagious fear. And the sudden drop in commodity prices isn’t exactly setting the world economy alight, either.
We also learned that high oil prices do draw a response from consumers, both directly and in the producers of oil-using machinery. The US auto industry’s woes began well before the financial crisis, as US buyers fell out of love with the Ford F-150 and the Chevrolet suburban. In Australia, Commodore and Falcon sales continued to decline, to the point where Holden and Ford have announced a return to the small car business. Public transport usage boomed. And people simply drove less. And, collectively, these factors pushed down demand for petroleum in both the USA and Australia. Not huge amounts, but there were absolute drops in petrol demand. And much of the technological response from the car makers is still to come, both with high-profile projects like the Chevrolet Volt (which will survive, no matter how much the US government has to throw at GM to make it so), and broader incremental changes across the ranges of many car makers.
To sum up, I don’t reckon we learned much at all about the state of the world’s oil reserves last year. But I reckon we collected a fair bit more evidence that commodity prices – at least, at the levels they reached last year – don’t really affect developed countries nearly as much as we might think. And we do, collectively, respond to the higher petrol prices in such a way as to reduce demand. Whether we can respond quickly enough to avoid disaster if oil production really tails off dramatically remains an open question, and still might be a very important one. Pity it’s completely slipped off the radar, just like bird flu (which hasn’t gone away either).
The commodity prices weren’t high enough long enough to result in a significant long term shift. For most of the commodities boom, the long term expectation was still for supply to catch up to demand prices to come back down. Thus long term planning and projects were typically not impacted to any great extent, with delays being the main effect. If a genuine supply limitation were to indicate that higher prices would be maintained indefinitely, a significant shift in strategic & long term planning would take place.
The investments in extraction of the past few years will help depress the oil price for a while yet, though I’m not resource economist so I won’t guess how much
You mean that old-school demand curve has some relevance even in today’s post-internet age? Whodathunkit.
I was interested to note that the Age says falling demand is pushing up water prices. Because fixed costs are such a big part of the water system, lower usage than forecast means the price per unit has to go up. I wonder if the same effect will become more visible in oil prices – we’re seeing it to some extent already obviously, but the cost of extraction continues to rise.
Robert,
We have a lot of oil (and gas) people over in Perth at the moment – and all of them are saying that many long-term investments for all of the energy companies are being pulled. Looks like we will just end up with another price spike in 6 to 7 year’s time – which will then fall back. A fair bit of the extra capacity built up over the last two to three years will probably come on stream in a year or so – meaning the price has further to fall.
Ho hum. Hog cycle anyone?
Andrew Reynolds,
That’s one of the great things about capitalism, no one knows we’re all going to run short of something until we do and prices go through the roof.
Yes, Desipis. All those wonderful people from the government get it right every time. Isn’t socialism just peachy keen?
Anyone care to venture a guess as to how much the loose capital that was flowing about prior to the GFC pumped up the commodity prices?
Participants in a previous peak oil thread seemed to decline to think that speculators were a driving force as at the expiration of a contract the holder of the contract needs to take delivery of the oil . This apparently means that there were no speculators as they don’t take delivery of anything usually.
A couple of thoughts on this explanation occur to me .
The first is that the agent who accepts the delivery is going to be an oil company and they have no interest in oil prices declining. Keeping your margins the same at higher prices equals greater profits.
Secondly the China Boom story fueled plenty of price rises but without careful regard to the fundamentals in many markets .The supply constraints on iron ore seem to be more significant than the fact that there is an almost limitless supply in Australia and Brazil. China also was described and the place where” a million new cars were popping off the factory floors every year so oil must go up in price” sort of thing. But there aren’t a million people able to afford a new car every year above those already able to do so etc etc.
The recent oil price rise focused attention no the theory of Peak oil and probably at a useful time but the force of the speculators was many times greater a driver of the price.
Robert,
Sorry to nit-pick but I don’t see Holden and Ford as making ’small’ cars when they are forced to make a four cylinder vehicle. To me all the auto-industry descriptions of car size are bizarre, when thinking about the single person that cars most often are needed to transport. I would have no problem with seeing them as making smallER cars now – but ’small’? I don’t think so.
I’m not going to comment too much on this one, but Murph has got pretty close in his comment. The recent commodity price boom was very different from the the 1970s oil shocks because it was largely due to a positive demand shock (China et al) rather than a negative supply shock, though obviously the failure of supply to be able to respond quickly to the increase in demand is what allowed prices to increase so much. Because commodity prices rose because of the strength of global demand, one wouldn’t expect the shock to have a negative impact on economies in the way that a supply induced spike would have. Indeed, for a country like Australia that exports commodities, the rapidly rising terms of trade was stimulating the economy, not inhibiting it.
Note, industrial economies are also far less oil intensive now than they were in the 1970s.
Robert, most of your points on the impact of higher oil prices on public tranport, small cars, overall miles driven, etc can be summed up by saying that the demand curve for oil is downward sloping and that substitution from oil intensive goods and services to less oil intensive goods and services will increase demand for those products. Nothing new there!! There is a pretty detailed literature on the price elasticity of demand for oil. Unsurprisingly, the long-run elasticity is greater than the short-run elasticity.
Labor Outsider: interesting comments. However, I think it’s important to illustrate in a concrete sense that, in this case at least, the invisible does work in the way you’d expect it to.
Incidentally, Robert Rapier is reporting that the SUV share of the vehicle market in the USA is heading back up…
“Incidentally, Robert Rapier is reporting that the SUV share of the vehicle market in the USA is heading back up…”
Ever tried to fit a family of four, two dogs and luggage into a Prius?
That is one of the crazy elements of the government’s decision to offset petrol price increases through the ETS with excise cuts. With oil prices relatively low again, very little long-term behavioural change will occur, unless there is another spike in oil prices when the global economy begins to recover in 2010. The benefit of pricing through the ETS (or even better, through a carbon tax) is that it allows that long-term price signal to be sent clearly. My understanding is that Prius sales have collapsed in recent months in the US – not suprising when you consider the massive fall in gas prices, as well as the recession – the sector has been hit by an income and substitution effect at the same time!
Desipis: It’s capitalism
Andrew: It’s socialism
Desipis: Capitalism!
Andrew: Socialism!
Desipis: Capitalism!
Andrew: Socialism!
Desipis: Capitalism!
Andrew: Socialism!
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People.. settle. It’s not socialism v capitalism. They both suck.
I wasn’t criticising capitalism in general, just they way the current implementation of it encourages secrecy. Something which results in less information being available to any given predictor for long term decision making and thus poorer predictions. It puzzles me how some people think the market mechanism, something that depends on fully informed participants, is an ideal way to determine the flow of information.
#11
When I was a kid I went on a camping holiday with my cousin, my parents, my brother and his wife and a dog to the Flinders Ranges for 2 weeks.
In a Morris Minor.
Desipis – The idea of public education, at least in the modern world, began as something that pro-market intellectuals thought necessary. If everyone was going to participate in the exchange of goods and services they should know how to read, write and do sums. How else could they negotiate, understand and enter into contracts?
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That was two hundreds years ago. Now we see the huge concentration of capital in mega-corporations and the market running on the satisfaction of desires which are created by ever better advertising. The techniques of advertising (which btw have learned an awful lot from totalitarian propagandists) are becoming so sophisticated that infants are targeted these days. The idea is to embed logos subliminally in their minds creating a priori brand loyalty.
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Obviously this is less and less to do with ‘the free market’.
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The trouble, as I see it, with the typical political debate which takes place between socialist and liberal thinkers is that in arguing over the desirability of the free market neither is noticing that what is in effect happening is neither a free market nor a social-democratic alternative but a corporate technocracy.
Two questions for Robert, or anybody else who’s knowledgeable about all this…
a) I would assume (could be wrong) that there exists a price equilibrium in oil where at a certain point it becomes cost-effective to exploit the (at present too expensive) shale and tar-sand oil deposits in North America, which are vast. Doesn’t this affect the Peak Oil idea, or is the price of processing those resources inherently prohibitively high?
b) While I suppose it’s true on paper that the oil spike didn’t directly cause the credit crisis, it’s my theory, from simple direct observation, that too many people pushed themselves right to the edge of their financial shock-absorption capabilities in buying into the inflated real-estate circus with preposterous loans; they were sort of gambling they could hang on, just so long as One Bad Thing didn’t happen; but the oil spike was enough of a Bad Thing to inch them over the precipice, with famous results. Might we not say then that the oil spike was a main contributing factor to the financial crisis, or does that model overlook something essential?
a) used to read of figures about $60 a barrel and there is enough profit for tar sand processing. Messy , dirty process though.
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b) Oil price rises pushed inflation maybe and then interest rates were raised to respond to this .While the part of total energy costs specifically related to oil may have declined the markets also saw that coal was in demand and there was a sort of speculative contagion in all energy sectors .
I imagine there was huge business recyling the capital as it piled up in The East particularly Japan and China , the Middle East and Russia as investments in derivatives and as bonds .
Now the US 30 year bond is at record low pay outs – 2.5 % . And all that capital available to invest and the supervisors can’t think of anything better to do than buy these bonds. 2.5% will be lower than inflation over 30 years (you’d bet) so what a great scheme to get access to other’s money at the lowest possible interest rates. What a scam!
j_z_z: As far as part (b) goes, I dunno, but inflation never got that high even with the rise in commodity prices, and secondly I’ve not seen expert opinion making that claim (or maybe I haven’t seen the writings of the right experts).
As far as a) goes, that’s precisely my view. But the peak oil view on these is:
a) they’re environmental nightmares (this is in large part true, though CCS could ameliorate the of the process emissiosn)
b) there are limits to how quickly it can be extracted (possibly true for oil sands, but for coal?)
c) in some cases, the energy you get in is less than the energy you use in the process (close enough to true for corn ethanol, not true for the others, and possibly irrelevant depending on what the alternative energy is).
FWIW, my view remains that we’ll have to voluntarily stop burning fossil fuels well before resource depletion forces us to stop using them as we do at present. But teven he consequences of a mass shift away from conventional petroleum would be considerable, and should at least be thought about a bit.
JPZ
On b), I think it is better to think of the spike in oil and other commodity prices as one element in a broad set of global economic imbalances that existed over recent years. There was a speculative bubble in a number of asset classes, regulators took their eye of the financial institutions they were supposed to be supervising, risk was underpriced, global monetary policy too lax, etc. The proximate cause of the financial crisis was the realisation by financial institutions that default rates on sub-prime mortgages was going to be much higher than they expected, and that the derivatives priced off securitised sub-prime loans were significantly over-valued. Default rates on sub-prime mortgages increased because too many were offered at teaser rates and the borrowers could not afford them when interest rates were eventually reset, and when the Fed was raising rates as the economy picked up through 2005 and 2006. These things started to happen before oil and other commodities reached their peak in July 2007, though it is probably fair to say that high commodity prices were depressing real incomes for many consumers.
So, I wouldn’t say that the spike in oil was the “one bad thing” that generated the crisis, more that there were a number of very bad things that came together to produce the mess that we are in.
It’s hard to see that the current slump in oil prices is going to do anything but bring any potential supply crisis forward, as it must be making a lot of new supply projects uneconomical. The IEA are still looking at 2012 as a likely “crunch” point where supply will fall significantly short of projected demand – I’m willing to bet we’ll see that a good year or so earlier now.
I’d also suggest it’s a mistake to totally discount high oil prices as a factor in the recent economic downturn – it may not have had anything to do with triggering the financial crisis, but a financial crisis isn’t as necessarily linked to a general recession as some might suppose.
Wiz, it is certainly true that the reduction in commodity prices will render a number of new projects uneconomic, but it is also the case that the recession, which could be very deep and prolonged, is significantly reducing commodity demand. The only circumstance in which I could see the crunch point being brought forward is if companies shelve the projects, but the global economy springs back to life faster than is currently expected. That is possible, of course, but it wouldn’t be my central forecast. Note, Japanese (they are by far the largest purchaser of Australian coal) industrial production fell 16% over the past year!!
“But then, if the huge drop in oil prices doesn’t tell us much about peak oil, did the price spike of 2008 tell us anything either? In hindsight, not a great deal.”
But not just in hindsight for many. A lot of people were saying that high oil prices merely reflected massive demand, as widely-accepted and mundane economic theory predicts, rather than the veracity of the Peak Oil narrative. The fact that petrol prices have come off has, or ought to have, essentially shredded the credibility of countless short-term doomsayers (”oil will never go below ‘$x’ ever again, get used to $200 per barrel oil, etc., etc.”). The thoughtful Peak Oil enthusiasts had, and still do have, their eye on 2020, 2030 and beyond.
Anyway, bring on the inevitable solar/wind-battery transport and carbon manufacturing revolutions and we can be (largely) done with all this stuff. I’d say they are each 15 years away, at most.
BBB
There can’t be much hard economics to Peak Oil if manufacturers are going back to SUVs and so on – and oil-use is spiking up again. But maybe the PO ‘end-is-nigh’ crowd will be proved correct down the track?
With a corrupt crony cartel in the oil business for decades now its hard to factor in market-forces – even if derivatives markets get a fail in some quarters already. But there are enough market-forces to lower the price of petrol here where I am so I’m not screaming for energy nationalization just yet. And even if I was I would want some pretty heavy-duty offsets before I just hand over to the State Oil Corporation levels of absolutist power. Power corrupts engines and fouls plugs.
L.O., obviously it depends on the speed at which the global economy recovers, but even if it takes a good 2 years, by 2011 we would be using oil at at least the same rate as it was being used mid-2008. But if any significant number of new-supply projects have been put on hold in the meantime, it’s quite possible that it won’t be possible to maintain the same global supply rate we had in mid-2008. In which case we would be eating into inventories, seeing sky-high prices, and oil producers all over the world scrambling to resurrect on-hold projects.
BBB – it’s certainly conceivable that within 15 years we’ll have technologies good enough to significantly reduce our demand on oil, but I’m not so sure they will be so widely adopted that a country like Australia with a still rapidly growing population will actually be demanding less oil than it does now. And if not, that meanswet will importing a hellavu lot of it, in intense competition with other nations also trying to import whatever producing nations have left to export after their own internal consumption.
Why would they be put on hold? Such projects are funded on the basis of projections of future earnings, and hence return on investment, which in turn are based upon projections of future supply and demand, and hence oil prices.
If it is going to take five years to get a new project on line and therefore earning revenue then the current price of oil is irrelevant. It is the projected price in five years time that matters.
Greg, sure, that’s true, but the credit crunch has also made it much more difficult to get funding for new projects.
And some projects will be put on hold because the resources needed for those projects can be more economically deployed elsewhere – especially ones that can’t even turn a profit at $35/bbl.
It’s also the case some of the new supply anticipated for 2011-2012 was to come from projects that haven’t even been started yet. At $100+/bbl, they would be immediately highly profitable, and the funding to get them up and running would be pretty easy to get. At $35/bbl, you now have to make the case to investors that prices will likely to rise to $100+/bbl again for the projects to be profitable.
It’s hardly just me suggesting this btw, see http://www.iht.com/articles/2008/12/15/business/oil.php for example.
My understanding of the arguments of the more sensible “peak oilers” is that the price will become more volatile in response to demand fluctuations long before we start actually running out of oil. That’s because the cheapest oil to exploit is used up first, so the supply curve begins to slope upwards more.
Recent events are consistent with that line, though I’m not really qualified to say if the rest of their arguments hold.
Apparently a lot of that inflated price was hedge fund speculation and part of the mechanism was borrowed contracts much as shares lent by investment funds are used (apparently) for short trading. You have got to wonder whether all of this was a giant form of money laundering (famous new term to cap off 2008 “giant Ponzi Scheme”). After all, the money sent to Lehmann Brothers and the like by superannuation funds and private investors around the world went somewhere, and is a credit balance in someones bank account. There was a time when money had the status of matter, it could be neither created nor destroyed. It could only be relocated.
In today’s world it seems that massive amounts of money can be vanished without trace as if it never existed and all that one has to do is give it a name….Global Finacial Crisis….Giant Ponzi Scheme…. and suddenly we understand, we have an explanation, so move on. If that is what we want to believe. And I think that a total lack of political backbone is going to make that the reality.
Personally I think that an important opportunity to reshape our transport infrastructure in a timely manner has been lost with collapsed oil prices. Certainly the lower petrol price is a relief, particularly for those facing mortgage stress, but an accelerated move to electric vehicles and alternative fuels would in the medium term provide a far greater advantage than a hiatus in high petrol prices is going to give. This is a situation where a flexible carbon tax could have been used to drive industry developments in directions where they need to go but cannot in a pure market environment.
“Peak Oil” will return again. It is a bit like predicting a share market crash. Every body knows that it is going to happen, just not now. Ooops too late!
BBB and BilB, Ken Deffeyes has made a convincing case for peak oil having already been passed. He (slightly tongue in cheek) placed it at Thanksgiving 2005.
DI,
Keep in mind that if oil consumption drops and then steadily reduces, then peak oil could extend some time into the future, even if it had already passed. And there are a number of ways that that can happen, only some of which are good for the environment. So point taken, but even the most studied assessment can be at best a guess, at this stage.
Indeed, BilB. It’s more likely to be a plateau than a peak, so the downslope will be postponed as the world’s economies contract, but I’d be surprised if any of the oil producers could actually increase production at this point.
Well here’s one from James Hamilton: The oil shock and recession of 2008.
FWIW I don’t believe the oil spike contributed much to the current crash. If anything it was a symptom of the credit bubble, with oil demand being driven by the global credit binge.
In my view the price spike of 2008 was due to demand bumping up against supply constraints, with a healthy dose of the aforementioned hedge-fund speculation. Now that demand has come off considerably, we’re back to a situation where the world has several million barrels per day of spare capacity, and with no likelihood of that spare capacity being threatened in the near term, prices have collapsed.
All this means is another period of underinvestment in oil exploration and production (and alternative transportation technologies) so oil will spike again when the global economy recovers, and peak oilers will have another day in the sun.
This post has been linked for the HOT5 Daily 1/6/2009, at The Unreligious Right
Speaking of Peak Oil, here’s an interesting article I found today via FriendFeed – “Fermi’s Paradox and the End of Cheap Oil” – http://radar.oreilly.com/archives/2008/05/fermi-paradox-and-end-of.html
Actually David, currently most OPEC producers probably do have capacity to raise production, as they have recently cut back production in response to falling demand. But as of early-mid 2008 pretty much everyone was pumping at full capacity, so if global production rates are ever to surpass that rate, then a lot more new projects need to be brought online (actually this is true just to maintain that rate, given a good percentage of currently produced fields are already in decline).
It is possible however that if the global economic situation takes a very long time to recover (say, 5 or more years) that Peak Oil has indeed already passed – if in the next 5 to 10 years technologies that significantly lower oil demand become commonplace (PHEVs/EVs etc.) then by the time economy is back to mid-2008 levels in terms of GDP etc., total oil demand could actually be lower. However without explicit government-backed incentives this seems unlikely, because during recessionary periods consumers are far less likely to upgrade vehicles, even though there’s potentially a significant financial advantage over, say, a 10 year period. The area where perhaps there’s the most potential to reduce long-term oil demand during a recessionary period is in the implementation of better public transport, as that’s the sort of project that can be justified on economic stimulus grounds, and there’s probably more willingness among commuters to consider “cost saving measures” such as using PT (offseting that however is the fact that a) petrol is currently cheap and b) there’s slightly less traffic on the roads, so driving is a more attractive option).
A document by Matthew Simmons that attempts to explain how the financial and energy crises are interlinked. (He’s a former adviser to Bush’s energy taskforce and wrote Twilight In The Desert, a book that questions the credibility of Saudi Arabia’s stated oil reserves)
http://www.simmonsco-intl.com/files/Houston%20Energy%20Institute.pdf