Petrol prices will escalate!!

[Nasty]

Check this out! I think we are being forewarned here, what can we do about this? It will decimate our local economy and job losses galore!!
Think of the implications $3 a litre will cause.

http://stuff.co.nz/4507628a10.html

I think the term I would use is desensitised rather than forewarned ... now they have said it once they will continue saying it!

[rainman]

The upside is, high prices are good for availablity, as there is a whole big heap of oil still to be sucked out of the ground that has hitherto not been a financially viable option. Soon it will be.

Now that's a theory that's been bandied about for years, it's just the value of "financially viable" always seems to change... And despite E&P costs and rig counts going up, production for the oil majors is pretty close to flat.

It's like the Alberta tar sands (which are indeed large). Despite the current high prices, they're still not forecast to ever produce more than about 3mbd. In a world where we use 83mbd or more, and need to grow this to 120mbd by 2015 to preserve BAU.

And Brazil's Tupi field (another recent largish find) is 10kms below sea level, under hot, high-pressure, highly corrosive salt deposits.

"Tapping what may be the biggest oil finds in the Western Hemisphere in three decades will require equipment that can withstand 18,000 pounds per square inch of pressure, enough to crush a pickup truck, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick." (Bloomberg)

Possible, yes, of course. Cheap ("financially viable"?), no. And I'd bet the Brazilians will drop the Tupi project smart quick if oil backs down to $80-90 owing to a bit of recession-led demand destruction...

[eliot-ness]

So, no room in your mental model for actual physical shortage then? Not to mention other geopolitical factors outside of the control of the oil co's that make supply inaccessible?

Also, your logic is flawed: if price rises and demand can keep pace (as it broadly seems to be able to do at the moment) then why would the market care that the poor people in one place are no longer buying, but the less-poor people in another place are? Supply substitution may be a problem, demand substitution is way easier, at least until we have another great depression.

1/ Apart from the world war two years the first physical shortage was at the time of the Suez crisis when petrol was severely rationed in the UK and when the Arabs took over the oil fields. At that time it was forecast that oil supply would run out before the end of the century and if an alternative wasn't found cars would become obsolete. The reverse happened, New fields were found and in the 60s the number of cars increased faster than ever before and that trend continues.

2/ Oil company profits will never depend on the rich, there would be no logic in pricing ten million cars off the road in one country in the hope that ten million in a more affluent country would make up the shortfall. The future of increasing profits relies on increasing use of the product worldwide, not just for the exclusive use for the few who can still afford it. That would be a rapidly descending spiral into oblivion

Personally I prefer to remain optimistic, and my forecast is that the number of cars on the road will double in the next twenty years, China, with it's low average income will become the worlds biggest oil consumer; and the pessimists will still be forecasting doom and gloom. I may just hang around long enough to see it.

[rainman]

1/ Apart from the world war two years the first physical shortage was at the time of the Suez crisis when petrol was severely rationed in the UK and when the Arabs took over the oil fields. At that time it was forecast that oil supply would run out before the end of the century and if an alternative wasn't found cars would become obsolete. The reverse happened, New fields were found and in the 60s the number of cars increased faster than ever before and that trend continues.

So, drawing conclusions from this:
a) shortages have occurred in the past, causing rationing (and price hikes, I'd expect?)
b) however around 1956 some forecasts of depletion were made which have proven not to be absolutely accurate
...therefore, ignoring the fact that oil production is affected by a wide range of factors that are just about impossible to predict with the accuracy you seem to demand, all will be peachy evermore for our current motoring lifestyle? Infinite growth is fine - because we found more oil before, we will always continue to do so? That's a big claim to have to prove.

Around 1956 Hubbert predicted the peak (not running out, maxing out) of US lower 48 states oil production. He got that right to within a year or so (1971). How's that fit your model?

There were indeed more discoveries in the 60's and 70's, but discovery peaked in the 60's. How's that fit your model?

2/ Oil company profits will never depend on the rich, there would be no logic in pricing ten million cars off the road in one country in the hope that ten million in a more affluent country would make up the shortfall. The future of increasing profits relies on increasing use of the product worldwide, not just for the exclusive use for the few who can still afford it. That would be a rapidly descending spiral into oblivion

But if there is steady demand (not hope of demand) from China and India at a price that most of Africa can't afford, then there is no problem in sustaining the high prices, even if it means the Africans have major impacts to their transport and agriculture systems. Markets aren't inherently moral or equitable - if a buyer will pay, the price will rise.

Personally I prefer to remain optimistic, and my forecast is that the number of cars on the road will double in the next twenty years, China, with it's low average income will become the worlds biggest oil consumer; and the pessimists will still be forecasting doom and gloom. I may just hang around long enough to see it.

Good luck with that. Optimism is useful, because we do currently still have a great opportunity. Blind optimism as an article of faith is just silly.

I agree China and India will continue to be big in relative terms, and even that they will growth their share of oil, but the pie is likely to be shrinking in the medium term, and staying about the same size for the short term - a plateau followed by a decline, in other words. In the meantime, increasing demand as the BRICs industrialise, plus lower export quantities as the exporters increase domestic use, will lead to more expensive oil for the rest of us. We are a long way from running out, but the age of cheap oil is over.

[eliot-ness]

So, drawing conclusions from this:
a) shortages have occurred in the past, causing rationing (and price hikes, I'd expect?)
b) however around 1956 some forecasts of depletion were made which have proven not to be absolutely accurate
...therefore, ignoring the fact that oil production is affected by a wide range of factors that are just about impossible to predict with the accuracy you seem to demand, all will be peachy evermore for our current motoring lifestyle? Infinite growth is fine - because we found more oil before, we will always continue to do so? That's a big claim to have to prove.

Around 1956 Hubbert predicted the peak (not running out, maxing out) of US lower 48 states oil production. He got that right to within a year or so (1971). How's that fit your model?

There were indeed more discoveries in the 60's and 70's, but discovery peaked in the 60's. How's that fit your model?



But if there is steady demand (not hope of demand) from China and India at a price that most of Africa can't afford, then there is no problem in sustaining the high prices, even if it means the Africans have major impacts to their transport and agriculture systems. Markets aren't inherently moral or equitable - if a buyer will pay, the price will rise.



Good luck with that. Optimism is useful, because we do currently still have a great opportunity. Blind optimism as an article of faith is just silly.

I agree China and India will continue to be big in relative terms, and even that they will growth their share of oil, but the pie is likely to be shrinking in the medium term, and staying about the same size for the short term - a plateau followed by a decline, in other words. In the meantime, increasing demand as the BRICs industrialise, plus lower export quantities as the exporters increase domestic use, will lead to more expensive oil for the rest of us. We are a long way from running out, but the age of cheap oil is over.

a/ Shortages of oil have never occured in the past. The Suez crisis escalated in a war between France, Britain and Egypt which in turn resulted in a shortage of supply and rationing in the UK. The price hikes were within the customers ability to pay, as always.

b/ Forecasts from that time were not simply inaccurate, they were totally wrong, as has been proved. Production now, nearly 50 years later is higher than ever before. c/ I have never demanded total accuracy, never even mentioned it, but a bit better than total inaccuracy would be an improvement.
Nor have I said "everything will be peachy evermore for our motoring lifestyle" The words I used in my first post were, "in the near future".

c/ Peak oil production can be predicted to the day, if you are in charge of production. Production now is limited to keep prices stable and it can be, and is, increased or decreased on demand to control prices.

d/ China is unlikely in the next 50 years or so to reach the level of income that most other developed countries enjoy. At the moment the average hourly rate is lower than that of Mexico. Yet the number of vehicles on their roads is increasing faster than anywhere else in the world. Could it be that oil is supplied to them at a lower price? ie. a price the customer can afford.

Finally. My optimism is far from blind. It's built on a fairly long lifetime of observation and, being an incurable optimist, I still enjoy life.
Pessimism however is an excercise in futility. Its only reward, if you manage to get it right, is to say "I told you so" when everyone else has forgotten what you said in the first place.

[rainman]

a/ Shortages of oil have never occured in the past. The Suez crisis escalated in a war between France, Britain and Egypt which in turn resulted in a shortage of supply and rationing in the UK.

Um, apart from the example you cite, how about 1973, and 1979?

The price hikes were within the customers ability to pay, as always.

The price hikes were within some customers ability to pay, as always.

b/ Forecasts from that time were not simply inaccurate, they were totally wrong...

What's "totally wrong"? Out by 10-15 years over a period of over a hundred? Besides, how does even a hundred incorrect forecasts mean that a peak can't occur?

c/ Peak oil production can be predicted to the day, if you are in charge of production.

I'm sorry, but that's just horseshit. It's just about impossible to estimate the size of oil provinces that accurately, and both demand and supply are affected by a range of factors which are hard to model. You obviously have no idea what you're talking about.

[eliot-ness]

Um, apart from the example you cite, how about 1973, and 1979?


The price hikes were within some customers ability to pay, as always.


What's "totally wrong"? Out by 10-15 years over a period of over a hundred? Besides, how does even a hundred incorrect forecasts mean that a peak can't occur?


I'm sorry, but that's just horseshit. It's just about impossible to estimate the size of oil provinces that accurately, and both demand and supply are affected by a range of factors which are hard to model. You obviously have no idea what you're talking about.

Once again for the less literate readers.
A/ Shortage of "supply" are the words I used. Nothing to do with the amount of oil availlable. There was a war on. Getting it from A to B was the problem.

B/ The number of cars on the road in the UK continued to increase despite higher prices and rationing and yes, even the lower paid still managed to run them.

C/ Don't know where your 100 comes from.The predictions were made in the late 50s and still haven't eventuated.

D/ the size of the oil fields has nothing to do with "controlling" supply. OPEC supply on demand and have total control of how much they supply.

E/ I have even less idea of what you are talking about.

[Mike748]

.........

But if there is steady demand (not hope of demand) from China and India at a price that most of Africa can't afford, then there is no problem in sustaining the high prices, even if it means the Africans have major impacts to their transport and agriculture systems. Markets aren't inherently moral or equitable - if a buyer will pay, the price will rise.

.............

I agree China and India will continue to be big in relative terms, and even that they will growth their share of oil, but the pie is likely to be shrinking in the medium term, and staying about the same size for the short term - a plateau followed by a decline, in other words. In the meantime, increasing demand as the BRICs industrialise, plus lower export quantities as the exporters increase domestic use, will lead to more expensive oil for the rest of us. We are a long way from running out, but the age of cheap oil is over.

Agreed

Simply put if it were my business I would:
-take any opportunity to reduce production costs eg produce less.
-preserve oil stocks for future sales eg produce less.
-supply just enough oil that alternative products remain non viable.
-make sure I had a good handle on the alternatives.

................
2/ Oil company profits will never depend on the rich, there would be no logic in pricing ten million cars off the road in one country in the hope that ten million in a more affluent country would make up the shortfall. The future of increasing profits relies on increasing use of the product worldwide, not just for the exclusive use for the few who can still afford it. That would be a rapidly descending spiral into oblivion.

Why not?. Cream it while you can and if the rich run out of money or find an alternative then drop your price. The more money you make for less product the better.

Then to top it off make sure the cheap alternative to be supplied to the less wealthy is also your product, of course it won't be anywhere near as good as it could be because you don't want the competition.

[puddytat]

Ahhh your splittin hairs...personally I think we're stuffed,dont you fellas believe in the word of GOD as written by several eternally squabbling religions about the end being nigh? Funny how they have quite alot in common....

[rainman]

c/ Peak oil production can be predicted to the day, if you are in charge of production.

D/ the size of the oil fields has nothing to do with "controlling" supply. OPEC supply on demand and have total control of how much they supply.

- Peak oil is the point when we produce more than we ever will again, the top of the "bell curve"
- Given no one country or organisation controls oil (it's a market) this ends up being roughly aligned with about 50% of the available reserves being used, although several factors affect this. Hopefully when we hit peak we've used less than 50%, not more, because that means a fast crash on the other side.
- Even in an individual province under single control, unless you know the total endowment you can't meaningfully guarantee peak production "to the day", particularly since production is affected by demand in the real world
- Despite this intrinsic uncertainty it is still logical to conclude that a peak will happen, and reasonable to forecast it based on aggregate performance of provinces to date (eg. US peaked in 1971, Iran in 1974, Mexico in 2004, Norway in 2001, UK in 1999. Production is falling in 60 countries).
- There is some debate about exactly when this will happen but it is generally accepted that it will happen, even by mainstream economists and oil co execs (eg Chevron)
- Optimists cluster their forecasts around 2030ish, doomers around now
- Either way there is not a lot of time to address the issue given the magnitude of the task. Markets can help solve this but we are the (literal) drivers of those markets. Now is the time for a rational debate on whether to restructure our economies to reduce our dependence on oil.

A/ Shortage of "supply" are the words I used. Nothing to do with the amount of oil availlable. There was a war on. Getting it from A to B was the problem.

So there was an effective shortage, but not at some theoretical overall level. Pardon me if I don't care about the semantics when the effective shortage of oil causes my actual fuel price to skyrocket and the real economy to tank, despite there being another trillon or so theoretical barrels in the ground.

C/ Don't know where your 100 comes from.The predictions were made in the late 50s and still haven't eventuated.

Fair cop, I was referring to the total length of the oil age, and didn't make that clear. All economic predictions are fraught with error (yes, even mine!) - consider those fools (cough, Yergin) who have continually predicted oil at $35 despite all evidence to the contrary. Or our MED forecast, which has been consistently wrong while the greenie nutbar peaknik forecast has been far more accurate.

It's just a risk management problem, with very incomplete information, but high stakes.