# A Crude Awakening: The Oil Crash **URL:** \ **Category:** Great Debates\ **Created:** [June 8, 2007, 12:55am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205 "2007-06-08T00:55:41Z")\ **Posts on this page:** 20\ **Page:** 5
**Author:** ![T\_SQUARE](https://avatars.discourse-cdn.com/v4/letter/t/9de053/32.png) [@T\_SQUARE](https://boards.straightdope.com/u/T_SQUARE)\ **Post date:** [June 12, 2007, 12:34am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/81 "2007-06-12T00:34:04Z")
[QUOTE=intention] Me, I’m a practical guy, I don’t believe much of anything, I go and look up the numbers myself. Bringing this conversation back to real numbers, the BP Statistical World Energy Review [Workbook](http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2006/STAGING/local_assets/downloads/spreadsheets/statistical_review_full_report_workbook_2006.xls) gives the following figures for oil reserves and usage in thousand million barrels per year: ```auto Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Proved Reserves Gbbl 688 717 727 762 770 877 909 996 1004 1001 1006 1011 1012 1018 1027 1049 1059 1070 1090 1115 1140 1173 1188 1194 1201 Usage Gbbl/yr 22 21 21 22 22 22 23 23 24 24 24 25 24 25 25 26 27 27 27 28 28 28 29 30 30 Years Remaining 32 34 35 35 36 40 40 43 42 41 42 41 41 41 40 40 40 40 40 40 41 42 41 40 40 ``` Note that there has been _no change_ in the number of years of oil remaining since 1986. Note that during that time, oil consumption increased by 36%, and thus proved reserves increased by that amount as well. Note that this does not include unconventional sources (oil sands, oil shale, coal conversion). So while we will undoubtedly run out of oil at some point, I don’t think it’s time yet for speculation about widespread depression … nor is there any indication that we’ll see prices at $200/bbl (barring a major Middle East war) any time soon. w. [/QUOTE] In general, I’m with you, but keep in mind costs to replace produced reserves are increasing. This is largely due to a dramatic increase in rig and equipment costs, so likely reflects more of a shortage of rigs than a shortage of oil. ---
**Author:** ![T\_SQUARE](https://avatars.discourse-cdn.com/v4/letter/t/9de053/32.png) [@T\_SQUARE](https://boards.straightdope.com/u/T_SQUARE)\ **Post date:** [June 12, 2007, 12:36am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/82 "2007-06-12T00:36:08Z")
[QUOTE=ralph124c] When you have all of the major oildfields producing at peak capacity, what happens if something goes wrong? Suppose 9simultaneously), Hugo Chavez facesa revolution in venezuela-and the oilfileds shut down. At the same time, saudi militants blow up a pipeline, halting output from the Ghawar oilfield. and a severe hurricane shuts down the Gulf of Mexico. oil would soar overnight-would the USA release the startegic petroleum reserve then? 😕 [/QUOTE] Sure, you could see short run price hikes due to this kind of “perfect storm” but in the long run, none of these factors have anything to do with ultimately recoverable reserves or crustal abundance. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [June 12, 2007, 1:14am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/83 "2007-06-12T01:14:27Z")
I was just going to say the same thing. Some people are talking about the oil sands as if they are some far-off replacement source. But Alberta is ramping up production as fast as humanly possible _today_. My brother is living in a trailer working in Alberta because there is no housing. Real estate in Edmonton has tripled in price in the last five years. There is now serious talk about putting a nuclear plant up north to provide the steam for extracting the oil, which will increase yields dramatically. As Gorsnak said, Alberta is currently on pace to be producing 3 million bbl/day in 8 years. And the only thing stopping us from producing more than that is a shortage of labor and infrastructure. But you can bet that if oil is $100/bbl and the world is crying for it, we’ll figure out a way to increase production a lot more. And Alberta’s sands are so vast that the government estimates we can continue to produce 3 million bbl/day for 400 years. And that’s assuming a recovery efficiency of only 20%, which was the estimated maximim 10 years ago. To give you an idea of how the market solves these problems, since then new techniques have been developed which have driven recovery rates up to 60%. So we may have 3 times as much usable oil as our current estimates predict. So… at least 3 million bbl/day for 400 years from just Alberta alone. Now add in oil sands located all over the world - Venezuela’s may be bigger than ours. It’s not hard to see how we can hit 20 million bbl/day, is it? > [@tomoe](#): > > The thing we need to be concerned about is that there is a point on the downward edge of the graph where we can’t extract the oil for energy, no matter how much is left. Now THAT crunch is a physical one and we’d better hope we’ve developed wind and solar by that time. It will be a condition of very rapid emergence of scarcity of oil energy regardless of how market forces affect things. If you can use nuclear power as an energy source to extract the oil, then the oil just becomes a battery - a way to store that energy for use in cars. Even if it takes twice as much energy to get it out, the oil is still useful. Essentially, you’re then driving a nuclear powered car. > [@](#): > > For the same reason, be wary of the supposed promise of nuclear. The processing that we’d need to do on spent fuel or sea water in order to get more fissile material suitable for power generation is very, very close to the break-even point, energetically. > > Actually, my father, who designed nuclear detection systems for power plants for a living, told me that back in the day it was known to be a temporary solution. Back in the day they didn’t have the technology they have now. The Japanese have developed passive devices for extracting uranium from seawater - basically a huge filter that is lowered into the ocean and which traps heavy metal. No energy required. They can now extract uranium from seawater for about 5-10 times the cost of current mined uranium. But since the cost of uranium is only a tiny fraction of the cost of nuclear power as a whole, you can increase the cost by a factor of 10 and only drive up the end-user cost of power by a few percentage points. > [@](#): > > The future for solar and wind look bright, however. They’ll be orders of magnitude more efficient in a few years. This is true. For example, carbon nanotubes have amazing properties including highly efficient conversion of sunlight into power, extremely efficient transmission of that power, and the ability to store very large charge densities. We may see car bodies made out of carbon nanotubes, where the entire car is a solar cell and its own storage device. There are some amazing technologies just around the corner. We’re not going to be burning oil for power 100 years from now. > [@RTFirefly](#): > > So maybe, once the price of oil goes north of $70/barrel, trillions of barrels of oil in the Canadian tar sands will be available in a cost-effective manner. If so, we’ve got nothing to worry about, at least with respect to oil supply. Currently, light crude is selling for $66/barrel, and I’d pay good money for a guarantee that my energy costs for the next 30 years would be based on the availability of petroleum at $70/barrel in 2007 dollars, not including whatever carbon taxes the government chooses to levy in the future. Hell, even $80. Actually, break-even for the tar sands projects underway are about $35/bbl. It’s the more difficult to get at stuff that’s higher, but we’ve got plenty of supply until we get to that point, and by then maybe we’ll have better extraction technologies. > [@Little Nemo](#): > > Step back and take a historical look at our civilization. We’ve been around for thousands of years and gotten along without oil products. Then in the last century or two, we’ve built up a huge new technological society which for the most part has been fueled by oil. But at some point, regardless of whether it’s in twenty years or five hundred years, the oil will run low. Will our technological society survive? Or is humanity just enjoying the good times while we spend our lottery prize and then we go back to work? A thousand years from now, people may look back at our times as a sort of anti-dark ages - a brief highpoint for mankind before civilization settled back down to its normal level. More likely, people will look back on this era and say, "Can you believe that they _burned oil_ for power? Talk about the dark ages! ---
**Author:** ![RTFirefly](https://avatars.discourse-cdn.com/v4/letter/r/c77e96/32.png) [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)\ **Post date:** [June 12, 2007, 1:32am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/84 "2007-06-12T01:32:49Z")
[QUOTE=T\_SQUARE] Simmons, an investment banker of some sort, believes this because he can’t believe Aramco isn’t going full bore maxing production as an Exxon or Shell would be doing. [/quote] You’re kidding, right? > [@](#): > > I’m sorry I can’t link you to an online cite, as a lot of my information comes from conferences, proprietary data, subscription stuff and just shooting the bull with experts. I recognize that this is weak, and I am not saying you would instantly see it my way if you “knew what I know.” It does kinda surprise me that if the experts know Simmons is full of it, that nobody’s refuted him more publicly. Of course, if they mischaracterize his argument and his background as completely as you, then the people you talk to are probably not experts. > [@](#): > > As for my associate who has been inside the control bunker, his only claim is that current production seems to be inline with official Saudi data, something which I believe Simmons is dubious of. Injecting water into an old field is standard procedure, and not a sign of disaster. Well, yeah, it is SOP for an old field. And as a field gets older, more and more secondary recovery techniques are brought to bear to keep production up. And as I said, according to Simmons, the Saudis are maxing them all out in Ghawar. > [@](#): > > My biggest problem with Simmons is his claim that oil will average above $200 per barrel in calendar 2010. It’s not like the truth of his argument will stand or fall on that claim. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [June 12, 2007, 2:24am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/85 "2007-06-12T02:24:18Z")
> [@RTFirefly](#): > > Well, sure, we’ve got the technologies, but it’s a question of applying them. Electric cars? We’ve done 'em. Now find me one. Hybrids? Well, we’re doing a bit better there, but even now, high-mileage hybrids are a small fraction of American new car sales each year, and even if they were half of all new car sales, it would take 10-12 years to realize that percentage on the roadways. Actually, more than that. 10-12 years is the average age of a car, but there are plenty of cars on the streets older than that. And no one is saying that we’re going to convert to all-hybrid or all-electric any time soon. But the point is that if oil did suddenly spike and suddenly gas cost $10/gallon, the turnover rate of the auto fleet would be MUCH higher, with personal SUVs and ‘muscle cars’ being the first to go. As for where the electric cars are, it’s looking like the next generation will be ‘plug-in hybrids’. The problem with electric has been battery size and cost. It’s simply not economical to build cars that can travel hundreds of miles on battery alone. Not with today’s battery technology. But you don’t need to do that. Something like 80% of all commutes are less than 20 miles. So instead of trying to build a car that can go hundreds on a battery, you make one that can go 40. Then 80% of car trips can be made on battery alone. For longer trips, you put a small gas engine in the car, which is not used to drive the wheels at all but is simply a gas generator for recharging the battery. We can build those vehicles today en masse. For example, here is the [Chevrolet Volt](http://www.chevrolet.com/electriccar/). Built using off-the-shelf hardware (lithium-ion batteries, etc), the Volt will do exactly what I said - let you commute every day from the burbs and back without burning a drop of gasoline. Analysis of typical driving patterns, including longer trips, indicates that the average Chevy Volt would go about 500 miles on a gallon of gas. The main thing keeping this car out of production right now is the cost of the batteries. Not that they’re outrageous, but they price the vehicle out of the target range it would have to be in to sell to the mass market under today’s oil prices (I think the battery costs over $10,000, and needs to be closer to $2,000). But price gas at $10/gallon, and suddenly that $10,000 battery might not look so bad. So we CAN do it. It’s a question of the market providing the right incentives. And the incentives are now there. Both GM and Toyota, the two largest car manufactuers on the planet, plan to have plug-in hybrids on the market in 2 years. > [@](#): > > I’m not sure whether, by “market-based solutions” you mean “government, stay out and let the market work its magic” which means that we’ll adapt only when we’re forced to, and the resulting economic dislocation will be abrupt and painful, or whether you’re amenable to governmental constraints (such as higher CAFE standards) that let the market work, but within a tighter set of boundary conditions. I’m all for the latter. After all these years of debating on the SDMB, haven’t you got a better understanding of how markets work by now? Markets don’t wait for dislocations before responding. They respond smoothly and linearly to available information. Let me give you an example. Lets say the futures price for 10 year oil contracts suddenly shot up to 500/bbl. Do you think people would blithely drive their SUVs until the crunch hit? Do you think oil today would stay at a low price until suddenly it skyrocketed? The answer is no. Myriad forces would come into play overnight that would start -pushing people in the right direction. For example, an SUV would have its resale value depreciated compared to more fuel efficient vehicles. That would drive up leasing costs today, and push people into more economical vehicles. Sudden market dislocations are usually the work of governments. Laws DO happen overnight, and the market is sometimes forced to respond in drastic ways. Markets can also be dislocated when sudden changes happen, such as a hurricane or other natural disaster. But when information is available, the market reacts to it. As we learn more about where the price of oil is headed, the market will adapt, immediately and in the correct proportion. It’s not ‘magic’ - it’s the aggregate knowledge of all the experts in the world. A truly open market is self-correcting, because if the price of something (like a 10 year futures contract for oil) is way out of whack with reality, the people who know better will pounce on the opportunity and drive the price up. And that’s exactly what they do, but there are so many of them that the prices move incrementally as decisions on the margin change with new information. You can bet that the price of oil futures incorporates the best knowledge of the heads of the major oil companies, petroleum engineers, wildcatters, scientists and engineers working on oil extraction and sensing equipment, etc. All that information is collected and represented in the price of oil. I’ll stack that up any day against a tendentious author with an agenda and a book to sell. In any event, plug-in hybrids will begin trickling into the market in 2009. Will they be the ultimate winner? Who knows? The beautiful thing about the market is that many alternatives are tried. Some fail, some succeed. Maybe the stress on the grid of all those plug-ins will cause electricity to increase and make them expensive to drive. But then, the increased demand for and profit from electrical generation may kickstart the process of transitioning to more nuclear power. It’s hard to predict. Maybe a better alternative will come along in the meantime and relegate the plug-in hybrid to the auto wreckers of history. But that’s okay, because that solution by definition will be better. The problems come in when government gets involved. If some smart boy in congress decides that plug-in hybrids are the future and manages to rally enough support to pass a law mandating them, it could choke off innovation and research into alternatives, or cause a mass migration to plug-in hybrids that breaks the eletrical grid or causes a shortage of batteries or something. Or the idiots will respond to screams about the high cost of oil by trying to cap it or subsidize it, and therefore stunt investment in alternatives while simultaneously causing shortages. Because governments are stupid, and they’re a blunt weapon when a surgical scalpel is required. ---
**Author:** ![T\_SQUARE](https://avatars.discourse-cdn.com/v4/letter/t/9de053/32.png) [@T\_SQUARE](https://boards.straightdope.com/u/T_SQUARE)\ **Post date:** [June 12, 2007, 5:14am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/86 "2007-06-12T05:14:23Z")
[QUOTE=RTFirefly] You’re kidding, right? [/QUOTE] No. What part of my post is so fanciful to you that you assume I must be joking? [QUOTE=RTFirefly] It does kinda surprise me that if the experts know Simmons is full of it, that nobody’s refuted him more publicly. Of course, if they mischaracterize his argument and his background as completely as you, then the people you talk to are probably not experts. [/QUOTE] How, specifically, have I mischaracterized his background and argument? [QUOTE=RTFirefly] It’s not like the truth of his argument will stand or fall on that claim. [/QUOTE] Not necessity I suppose, but I would certainly trust an astronomer a lot less if a major element of his body of work claimed a massive asteroid would hit earth in 2010, and the vast majority of his colleagues disagreed. And a lot of his pocket money was coming from a popular press book that this claim drove sales figures for. ---
**Author:** ![intention](https://avatars.discourse-cdn.com/v4/letter/i/e95f7d/32.png) [@intention](https://boards.straightdope.com/u/intention)\ **Post date:** [June 12, 2007, 9:53am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/87 "2007-06-12T09:53:08Z")
[QUOTE=T\_SQUARE] In general, I’m with you, but keep in mind costs to replace produced reserves are increasing. This is largely due to a dramatic increase in rig and equipment costs, so likely reflects more of a shortage of rigs than a shortage of oil. [/QUOTE] **T\_SQUARE,** thank you for your reply.Your point is well taken, However, this only affects prices, not the number of years of reserves. And in general, the increase in prices will reduce consumption, thus increasing the number of years of reserves remaining. w. ---
**Author:** ![tomoe](https://avatars.discourse-cdn.com/v4/letter/t/49beb7/32.png) [@tomoe](https://boards.straightdope.com/u/tomoe)\ **Post date:** [June 12, 2007, 1:20pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/88 "2007-06-12T13:20:23Z")
[QUOTE=Sam Stone] If you can use nuclear power as an energy source to extract the oil, then the oil just becomes a battery - a way to store that energy for use in cars. Even if it takes twice as much energy to get it out, the oil is still useful. Essentially, you’re then driving a nuclear powered car. … Back in the day they didn’t have the technology they have now. The Japanese have developed passive devices for extracting uranium from seawater - basically a huge filter that is lowered into the ocean and which traps heavy metal. No energy required. They can now extract uranium from seawater for about 5-10 times the cost of current mined uranium. But since the cost of uranium is only a tiny fraction of the cost of nuclear power as a whole, you can increase the cost by a factor of 10 and only drive up the end-user cost of power by a few percentage points. [/QUOTE] Quite right, that’s not too bad - but, as you say, the cost of simply getting uranium is just a fraction of the cost. The biggest cost is refining uranium (or any other radioactive material) to the degree that it becomes acceptable for use in generating heat. This is actually a very energy-intensive process. You don’t just melt some uranium down like you would with some other metal. I’m not saying you can’t use it…it’s just not the infinite energy source we hope for. Sometimes technology can find a way to lower the energy cost of certain things. But sometimes it cannot. Eventually even the best technology will hit a physical wall where more energy cannot be extracted than the energy of extraction. But yeah…it’s a ways off, probably after we’ve developed solar and wind…and biofuels that aren’t the hideously stupid corn-based ethanol. ---
**Author:** ![Little\_Nemo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/little_nemo/32/3120_2.png) [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)\ **Post date:** [June 12, 2007, 5:07pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/89 "2007-06-12T17:07:31Z")
> [@](#): > > The discussion here shows just how much people fail to understand how the market works. The unorganized activity of entrepreneurs, inventors, and large companies works much better at solving these problems than any government program. Before oil was discovered, our nation was concerned that we were running out of whale oil (a fairly legitimate concern). But then some smart guy came along, figured out how to tap petroleum and turn it into kerosene, and all of a sudden our nation’s energy needs were met. Why? Not because of some government program, but because the price of energy was going up and he had an incentive to find a new resource. > > I know some people here have a hard time thinking that if it isn’t done by the government, it’s not going to get done. That just ignores history. When we are truly running out of oil (and we aren’t even close today), the price will keep going up. That will send a signal to the variety of greedy, evil companies in the world (who are just interested in making money) that they need to start developing other energy sources. They do this because there is a need for these sources and they will make money if they do so. That is how our nation’s transition to petroleum-based energy began, and that is how our nation’s transition away from petroleum-based energy will also begin. > > A grand government strategy is the last thing we need. Government cannot respond as efficiently as the market. In fact, government will likely only try and subsidize or encourage the development of alternative fuels that please certain constituencies but do little to actually help our energy needs (the history of ethanol subsidies is a perfect illustration of this). It will distort the market and actually delay the move away from petroleum-based resources. Renob, your responses are a little pavlovian. Is anyone in this thread actually saying that corporations are evil and we need a big government program? ---
**Author:** ![Renob](https://avatars.discourse-cdn.com/v4/letter/r/8c91f0/32.png) [@Renob](https://boards.straightdope.com/u/Renob)\ **Post date:** [June 12, 2007, 5:17pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/90 "2007-06-12T17:17:44Z")
[QUOTE=Little Nemo] Renob, your responses are a little pavlovian. Is anyone in this thread actually saying that corporations are evil and we need a big government program? [/QUOTE] Perhaps they are. I think I’m still suffering shell-shock from the old “Gas at $2.00 a Gallon by Election Day” thread where **gonzomax** and his ilk talked about evil corporations and the like. There was some suggestion earlier in the thread, however, about the government doing things such as raising CAFE standards and the like to help. I’ll grant that the discussion has veered away from that, though. ---
**Author:** ![RTFirefly](https://avatars.discourse-cdn.com/v4/letter/r/c77e96/32.png) [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)\ **Post date:** [June 12, 2007, 8:15pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/91 "2007-06-12T20:15:14Z")
[QUOTE=T\_SQUARE] No. What part of my post is so fanciful to you that you assume I must be joking? [/quote] The part that I quoted. > [@](#): > > How, specifically, have I mischaracterized his background and argument? Glad you asked. Background, **T-SQUARE** version: > [@](#): > > Simmons, an investment banker of some sort The fact that he’s been an investment banker _to the oil industry_ for the past 1/3 of a century, and that the company he founded is one of the largest in the field, might be at least of tangential relevance. No, he’s not a petroleum engineer. But he probably knows the industry about as well as an educated layman can. Argument, **T-SQUARE** version: > [@](#): > > he can’t believe Aramco isn’t going full bore maxing production as an Exxon or Shell would be doing. Kevin Drum summarizes Matt Simmons’ argument [here](http://www.washingtonmonthly.com/features/2005/0506.drum.html): > [@](#): > > Fundamentally, though, Simmons’s argument can be broken into two parts. The first and most detailed is a contention that Saudi Arabia’s mainstay oil fields may have already passed their production peaks and are unlikely to ever supply more oil than they produce right now. > > The standard response to this argument is that new technologies are allowing us to extract ever increasing ratios of oil from aging fields, but, in a clever bit of rhetorical jujitsu, Simmons stands this argument on its head. Saudi Aramco, he writes, is already using the most sophisticated technology in the world. Vertical wells are less and less common, replaced years ago by more efficient horizontal wells and more recently by even more efficient Maximum Reservoir Contact wells designed to suck the last possible drop out of aging oil pockets. Geosteering, 3-D seismic imaging, and increasing use of downhole intelligence are routine. Saudi technicians have a computer complex so sophisticated, they can literally stand in a room wearing special glasses and get a three dimensional view of reservoirs over a mile underground. > > In other words, there remains nothing to try. The best technology known to man has already been put to use all over Saudi Arabia in an increasingly desperate attempt merely to keep production steady at 10 million bpd. In the vernacular of the oil industry, Saudi oil fields have been in “secondary recovery” mode for years, and long experience elsewhere in the world has already taught us the limits of the advanced extraction technologies now being used in Saudi Arabia. They can mitigate production declines after a field peaks, but they can’t stave off the peak itself. More money and more technology won’t bail us out here. We’re up against geological limits, not financial ones. > > The second part of Simmons’s argument concerns exploration for new sources of oil in Saudi Arabia. Contrary to conventional wisdom, which assumes that Saudi Arabia is a vast expanse of desert that has only been lightly explored, Simmons presents considerable evidence to indicate that, in fact, almost every square mile has been mapped with the most sophisticated available modern tools–but with little return. In recent years, only one major field has been discovered outside the Eastern Province (home to all other major Saudi oil fields), and its performance has been problematic. The possibility of finding major new fields outside the Eastern Province looks considerably less promising today than it did a couple of decades ago. > > Simmons suggests that the Saudis have tacitly acknowledged this reality in their decision to pour most new investment into seeking to revive old fields instead of drilling in new ones. After all, why would Saudi Aramco expend so much effort on expensive attempts to resuscitate aging fields were there any genuinely promising new fields to exploit instead? Simmons concludes: “Unless some great series of exploration miracles occurs soon, the only certainty about Saudi Arabia’s oil future is that once its five or six great oil-fields go into steep decline, there is nothing remotely resembling them to take their place.” Doesn’t really condense to what you say it does, does it? It’s fine for you to disagree with Matt Simmons. I don’t know for sure that he’s right, and I’d love to see the best possible counterargument to the case he makes. But your setting up bullshit strawmen casts your credibility, not Simmons’ into doubt. > [@](#): > > Not necessity I suppose, but I would certainly trust an astronomer a lot less if a major element of his body of work claimed a massive asteroid would hit earth in 2010, and the vast majority of his colleagues disagreed. Since I’ve read a fair amount by and about Simmons, and I only found out about the bet a few days ago, I’d hardly consider the bet to be “a major element of his body of work.” YMMV, of course, and apparently it does. > [@](#): > > And a lot of his pocket money was coming from a popular press book that this claim drove sales figures for. A few decades as a successful investment banker with his own firm, and a middlin’ seller of a book has made a significant difference in his pocket money? Oh, I very much doubt that. ---
**Author:** ![RTFirefly](https://avatars.discourse-cdn.com/v4/letter/r/c77e96/32.png) [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)\ **Post date:** [June 12, 2007, 9:06pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/92 "2007-06-12T21:06:12Z")
[QUOTE=Sam Stone] After all these years of debating on the SDMB, haven’t you got a better understanding of how markets work by now? Markets don’t wait for dislocations before responding. They respond smoothly and linearly to available information. [/quote] **Sam** , please save the funnies for MPSIMS, my friend. Markets are often caught by surprise by dislocations. I’ve lived through some instances of that, including twice during the 1970s. Sometimes there is sketchy information, or practically nonexistent information. Sometimes people choose to believe that tomorrow will always look like yesterday, and the markets cater to them up until the moment that they can’t any longer ignore the fact that today’s _already_ different, and yesterday’s probably not coming back. Markets are composed of _people_, and both individuals and herds can act quite irrationally. I’m still seeing plenty of shiny new SUVs out on the road. Meanwhile, yes, demand for Priuses exceeds supply, but that’s because factories need to be retooled to build more of them, and that takes time, and Toyota doesn’t know how strong the demand will be. This is where CAFE standards would kick in: if Congress said “you need to produce a fleet average of X mpg by year 20YZ,” then Toyota would sit down and figure out how many Priuses and other high-mileage cars they’d need to sell to balance out expected sales of their SUVs and other lower-mileage cars, and they’d retool accordingly, before the market made them do it. This would have the effect of smoothing out the disruption, because government would be doing its job of thinking ahead, which is something a crowd does a terrible job of. > [@](#): > > And the incentives are now there. Both GM and Toyota, the two largest car manufactuers on the planet, plan to have plug-in hybrids on the market in 2 years. Ooooh - two years! And in what quantity? The answer, of course, is, enough to satisfy _projected_ market demand, but how many units will that be, and how much of a dent will it make in America’s oil consumption? > [@](#): > > Let me give you an example. Lets say the futures price for 10 year oil contracts suddenly shot up to 500/bbl. Do you think people would blithely drive their SUVs until the crunch hit? Having had no idea until earlier in this thread that there _were_ oil contracts of that term, I doubt that most other people are aware of them either. > [@](#): > > Do you think oil today would stay at a low price until suddenly it skyrocketed? The answer is no. And that’s what they’d react to, of course. Why would anyone sell oil at $66/barrel today, if they can get $500 for it in 10 years? Today’s price of oil would jump to the present value of $500 in 10 years, which at 5%, would be somewhere around $300. > [@](#): > > Myriad forces would come into play overnight that would start -pushing people in the right direction. For example, an SUV would have its resale value depreciated compared to more fuel efficient vehicles. That would drive up leasing costs today, and push people into more economical vehicles. Well, _yeah_. Suddenly people will be stuck with big, expensive cars they can’t afford and can’t sell for a decent price. They’ll be stuck with houses too far out in the 'burbs that they can’t sell either. People will go fucking _bankrupt_. > [@](#): > > Sudden market dislocations are usually the work of governments. Since what we’re talking about here are increases in CAFE standards, care to explain how this bit of theory applies to the specifics of this discussion? > [@](#): > > As we learn more about where the price of oil is headed, the market will adapt, immediately and in the correct proportion. It’s not ‘magic’ - it’s the aggregate knowledge of all the experts in the world. Only some markets are expert-driven. The main adaptation to possible futures for the oil market is in the manufacture of personal automobiles, which are owned by the general, nonexpert population. > [@](#): > > A truly open market is self-correcting, because if the price of something (like a 10 year futures contract for oil) is way out of whack with reality, the people who know better will pounce on the opportunity and drive the price up. Where can I buy Prius futures? And what good would that do - it would only make them more expensive for the people who needed to buy them! Markets can only adapt immediately if goods can be produced instantly. How long does it take an auto factory to switch from SUVs to hybrid sedans? > [@](#): > > And that’s exactly what they do, but there are so many of them that the prices move incrementally as decisions on the margin change with new information. As Simmons points out, information with respect to oil reserves is exactly the weak link. He’s read all there is to read on the state of the Saudi oil fields, and while he thinks he’s got a pretty good case, he acknowledges that he’s looking through a damned small keyhole, and he could be wrong. It’s quite possible - I’d say even likely - that at some point, information about the future of the oil supply will crystallize in a very short period of time. If we discover that oil has already peaked - which everyone pretty much acknowledges we won’t know for sure it’s happened until a year or two after the fact - then yeah, ten-year futures will go from $75 to $500 in a month, with the attendant dislocations in the here and now. But that’s OK, because the market will adapt instantaneously, no matter how much hardship it causes to actual _people_ in the process. > [@](#): > > The problems come in when government gets involved. If some smart boy in congress decides that plug-in hybrids are the future and manages to rally enough support to pass a law mandating them, it could choke off innovation and research into alternatives, or cause a mass migration to plug-in hybrids that breaks the eletrical grid or causes a shortage of batteries or something. Or the idiots will respond to screams about the high cost of oil by trying to cap it or subsidize it, and therefore stunt investment in alternatives while simultaneously causing shortages. Because governments are stupid, and they’re a blunt weapon when a surgical scalpel is required. And this strawman of yours relates to CAFE standards how? _Oogabooga! Government intervention! Run for the hills!!_ One would think that nobody had ever tried CAFE standards before, and their effects were unknown. ---
**Author:** ![RTFirefly](https://avatars.discourse-cdn.com/v4/letter/r/c77e96/32.png) [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)\ **Post date:** [June 12, 2007, 9:40pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/93 "2007-06-12T21:40:34Z")
[QUOTE=Sam Stone] As we learn more about where the price of oil is headed, the market will adapt, immediately and in the correct proportion. It’s not ‘magic’ - it’s the aggregate knowledge of all the experts in the world. [/QUOTE] And I will be especially impressed when “the aggregate knowledge of all the experts in the world” immediately relocates the nation’s housing stock to reflect people’s increased desires to live closer to jobs, central cities, and good public transportation in response to spikes in gas prices. That **will** be magic! 😃 ---
**Author:** ![slaphead](https://avatars.discourse-cdn.com/v4/letter/s/e9bcb4/32.png) [@slaphead](https://boards.straightdope.com/u/slaphead)\ **Post date:** [June 12, 2007, 10:47pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/94 "2007-06-12T22:47:27Z")
[QUOTE=RTFirefly] This is where CAFE standards would kick in: if Congress said “you need to produce a fleet average of X mpg by year 20YZ,” then Toyota would sit down and figure out how many Priuses and other high-mileage cars they’d need to sell to balance out expected sales of their SUVs and other lower-mileage cars, and they’d retool accordingly, before the market made them do it. … Today’s price of oil would jump to the present value of $500 in 10 years, which at 5%, would be somewhere around $300. … Only some markets are expert-driven. The main adaptation to possible futures for the oil market is in the manufacture of personal automobiles, which are owned by the general, nonexpert population. Where can I buy Prius futures? And what good would that do - it would only make them more expensive for the people who needed to buy them! … Markets can only adapt immediately if goods can be produced instantly. How long does it take an auto factory to switch from SUVs to hybrid sedans? [/QUOTE] Meh. Meet the [VW Lupo 3L](http://www.usatoday.com/money/consumer/autos/mareview/mauto497.htm), which could do 78MPG (one journalist managed 84MPG) in **1999** , using nothing more sophisticated than a diesel engine and a semi-smart transmission. Assuming no progress at all in reducing the $3000 cost premium for these components, and figuring that the price of a base VW Fox (the replacement for the Lupo) is [€8,990/$12000](http://www.iht.com/articles/2007/03/05/bloomberg/bxauto.php) after shipping it from Brazil to France, $15,000 gets you a car with better mileage than any hybrid you can buy today, using decade-old technology which can be made in any major car plant in the world with very little difficulty. Sure, it’s a shitty uncomfortable little car, but if gas looks like its going to hit $12-$13 per gallon (which your oil price implies) and you’re worried the economy collapsing, then you’re going to have to make some sacrifices. If fuel efficiency is the be-all and end-all (and crash and pollution reqs are accordingly slightly relaxed) then I’m sure you could make a functional little 80MPG diesel commmuter car for well under $10,000 in Mexico, Brazil, or wherever, by the million, today. The idea that its SUVs or super-fancy hybrids and nothing in between is just silly. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [June 13, 2007, 1:50am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/95 "2007-06-13T01:50:14Z")
[QUOTE=RTFirefly] **Sam** , please save the funnies for MPSIMS, my friend. Markets are often caught by surprise by dislocations. I’ve lived through some instances of that, including twice during the 1970s. [/quote] And I didn’t say otherwise. I said that markets can be hit by dislocations in the case of government action, or sudden disasters, or other events for which the market lacked information. I guess I could add things like sudden discoveries of major oil fields, or technological breakthroughs that radically change the market. For example, the ability to make gem-quality diamonds cheaply. > [@](#): > > Sometimes there is sketchy information, or practically nonexistent information. Sometimes people choose to believe that tomorrow will always look like yesterday, and the markets cater to them up until the moment that they can’t any longer ignore the fact that today’s _already_ different, and yesterday’s probably not coming back. But in the case of oil, there isn’t sketchy information. Okay, so maybe the Saudi government is hiding something (but if they are, they’re keeping the secret so well they don’t have any rich cousins pricing up oil futures), but Saudi Arabia is not the sole source of oil on the planet. Around the world, we have extremely good information on the state of oil reserves. There’s no mystery. And if there was a risk that Saudi Arabia was lying, the market would factor _that_ into the price of oil as well. Risk has a price. > [@](#): > > Markets are composed of _people_, and both individuals and herds can act quite irrationally. I’m still seeing plenty of shiny new SUVs out on the road. Meanwhile, yes, demand for Priuses exceeds supply, but that’s because factories need to be retooled to build more of them, and that takes time, and Toyota doesn’t know how strong the demand will be. The markets are generally rational. Individuals may be irrational, but markets are not. If they were, there would be smart people making a hell of a lot more than 10-15% per year speculating in them. It’s extremely hard to find market prices so out of whack that anyone with a brain can simply buy in and double their money in a couple of years. And you’re supporting your claim that people are irrational by pointing at SUVs. That’s begging the question. Why are SUVs irrational? People respond to incentives, and the cost of gas is only one factor in the equation. By the way, demand for Priuses has tapered off. I hear there are now dealer incentives on them in some places. > [@](#): > > This is where CAFE standards would kick in: if Congress said “you need to produce a fleet average of X mpg by year 20YZ,” then Toyota would sit down and figure out how many Priuses and other high-mileage cars they’d need to sell to balance out expected sales of their SUVs and other lower-mileage cars, and they’d retool accordingly, before the market made them do it. Sorry, but they’re only going to make as many Priuses as there is demand for. It does no good to raise your CAFE numbers by building cars that no one will buy. Ultimately, the market decides. CAFE standards are responsible for the SUV - when people couldn’t buy their big V-8 station wagons any more because CAFE restrictions prevented it, they bought SUVs instead, which were classed as light trucks and therefore exempt. CAFE standards are a lousy way to decrease fuel consumption. For one thing, if you make the cost of driving lower, people will drive more. If you’re worried about people moving out to the 'burbs, forcing them into cars that don’t cost as much to commute with is only going to make the problem worse. A much better solution is to simply put a tax on gasoline, and then let the people decide how much they want to spend and how much they value their SUVs. > [@](#): > > This would have the effect of smoothing out the disruption, because government would be doing its job of thinking ahead, which is something a crowd does a terrible job of. Absolute nonsense. Governments are _terrible_ at thinking ahead. Do you really think a few hundred elected officials are really qualified to make the best decisions regarding the technological tradeoffs of auto engineering? Please. Do you think the government is investing big in bio-fuels and forcing CAFE standards because that’s the smart thing to do? No. They’re investing in bio-fuels because a few powerful senators come from states that have big agri-businesses. It’s pork in the guise of environmentalism. Do you think they favor CAFE standards because that’s the best way to make our transportation infrastructure more energy efficient? No. They favor CAFE standards because the people want them to ‘do something’, but they don’t want their taxes raised. So as usual, the government figures out a way to push the problem off onto someone else. > [@](#): > > Ooooh - two years! And in what quantity? > > The answer, of course, is, enough to satisfy _projected_ market demand, but how many units will that be, and how much of a dent will it make in America’s oil consumption? I guess we’ll find out. If oil really goes to the prices Simmons says it will, then I’d guess demand will be very, very high. If it doesn’t, it won’t. > [@](#): > > Having had no idea until earlier in this thread that there _were_ oil contracts of that term, I doubt that most other people are aware of them either. The people who matter know all about them. The investment banks, the retirement fund managers, mutual funds… Those are the people who move markets, and they spend billions on expert analysis and research to make sure their money is invested where it can do the most good. Most of the big funds allocate a portion of the portfolio to risky investments. If there was real evidence that oil was horribly underpriced, they’d act and bid the price up. > [@](#): > > And that’s what they’d react to, of course. Why would anyone sell oil at $66/barrel today, if they can get $500 for it in 10 years? Today’s price of oil would jump to the present value of $500 in 10 years, which at 5%, would be somewhere around $300. That’s not the way it works. If the price of oil jumped to $300 tomorrow, demand would drop. Oil inventories would increase… And the futures price would come down. Also, holding that oil takes resources, and you have to factor in the risk that the demand for oil will change. If the futures price for oil went to 500bbl tomorrow, oil would definitely go up - until a new equilibrium was reached. What that new equilibrium price would be depends on many things, including the price elasticity of oil demand, the unknowns around exploration, etc. Anyway, if it were that simple, and the claim that the Saudis know that they don’t have as much oil as they claim to have is true… then why aren’t the Saudis cutting production and hoarding their remaining oil until the price skyrockets? > [@](#): > > Well, _yeah_. Suddenly people will be stuck with big, expensive cars they can’t afford and can’t sell for a decent price. They’ll be stuck with houses too far out in the 'burbs that they can’t sell either. People will go fucking _bankrupt_. There are lots of ways people could cut back, short of losing everything they own and going bankrupt. For instance, car-pooling would become a much bigger deal. Family outings in the car would be decreased. People would turn down the heat in their homes. Employers would find it advantageous to allow more people to telecommute, or to locate branch offices in the burbs so their employees don’t have to travel so far. Home deliveries and online shopping would gain a competitive advantage over driving to shop. Energy-intensive hobbies and sports would diminish in popularity. Those are all short-term changes that could be applied tomorrow to cut energy costs, if people had a real incentive to do so. And I think you’ll find the economy is a lot more robust than you’re giving it credit for. Here in Edmonton, the average housing price has jumped from $150,000 to $440,000 in five years. Yet the economy is still humming right along. Booming, in fact. People adapt. > [@](#): > > Since what we’re talking about here are increases in CAFE standards, care to explain how this bit of theory applies to the specifics of this discussion? Sure. I said governments cause dislocations. The CAFE standard is a perfect example. When CAFE standards were first imposed, the auto industry wasn’t ready for them. The result was a decade of crappy cars. Also, the CAFE standards caused the SUV boom - a major dislocation in the distribution of cars vs trucks. > [@](#): > > Only some markets are expert-driven. Yeah, like the major commodities markets. Like oil. I’ll grant you a bit of inexpert pricing in the herbal medicine and cosmetics markets. Not so much for pork bellies and Sweet Light Crude. > [@](#): > > The main adaptation to possible futures for the oil market is in the manufacture of personal automobiles, which are owned by the general, nonexpert population. Where can I buy Prius futures? And what good would that do - it would only make them more expensive for the people who needed to buy them! Now you’re talking nonsense. I have no idea what point you’re trying to make. If you’re saying that the general population is too stupid to factor the price of gas into their purchasing decisions, well, you’re wrong. Witness the collapse of the large SUV market when oil spiked in price, and the rapid rise of the smaller, more efficient cars and hybrids. People respond to incentives. Always have, always will. It’s one of Mankiw’s tautological rules of the market. > [@](#): > > Markets can only adapt immediately if goods can be produced instantly. How long does it take an auto factory to switch from SUVs to hybrid sedans? How long does it take you to decide not to drive to Grandma’s? Or to watch your lead foot in traffic? Or to decide that maybe you’ll combine those two trips to the store into one? Or to negotiate with your boss to let you work at home one day a week to cut your gas consumption by 20%? In the medium term, how long will it take companies to realize that if their employees are spending $500/mo for gas to commute to work, they have a powerful new negotiating tool against their competitors? Or for job applicants to start paying more attention to how close the job is to home or to mass transit when making a decision where to work? If energy intensive foods and products are suddenly doubled in price, how long will it take people to decide to buy the cheaper alternatives? There are millions of ways the economy can adapt in the short, medium, and long terms. > [@](#): > > As Simmons points out, information with respect to oil reserves is exactly the weak link. He’s read all there is to read on the state of the Saudi oil fields, and while he thinks he’s got a pretty good case, he acknowledges that he’s looking through a damned small keyhole, and he could be wrong. And no one with any money to invest seems to agree with him. He’s a lone voice in the wilderness. But if you’re so sure he’s right, why aren’t \*you investing in oil futures? They’re your road to riches, man. > [@](#): > > It’s quite possible - I’d say even likely - that at some point, information about the future of the oil supply will crystallize in a very short period of time. What’s your evidence that it hasn’t already? Aside from Simmon’s book, that is. ---
**Author:** ![RTFirefly](https://avatars.discourse-cdn.com/v4/letter/r/c77e96/32.png) [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)\ **Post date:** [June 13, 2007, 1:52am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/96 "2007-06-13T01:52:27Z")
[QUOTE=slaphead] Meh. Meet the [VW Lupo 3L](http://www.usatoday.com/money/consumer/autos/mareview/mauto497.htm), which could do 78MPG (one journalist managed 84MPG) in **1999** , using nothing more sophisticated than a diesel engine and a semi-smart transmission. Assuming no progress at all in reducing the $3000 cost premium for these components, and figuring that the price of a base VW Fox (the replacement for the Lupo) is [€8,990/$12000](http://www.iht.com/articles/2007/03/05/bloomberg/bxauto.php) after shipping it from Brazil to France, $15,000 gets you a car with better mileage than any hybrid you can buy today, using decade-old technology which can be made in any major car plant in the world with very little difficulty. Sure, it’s a shitty uncomfortable little car, but if gas looks like its going to hit $12-$13 per gallon (which your oil price implies) and you’re worried the economy collapsing, then you’re going to have to make some sacrifices. If fuel efficiency is the be-all and end-all (and crash and pollution reqs are accordingly slightly relaxed) then I’m sure you could make a functional little 80MPG diesel commmuter car for well under $10,000 in Mexico, Brazil, or wherever, by the million, today. The idea that its SUVs or super-fancy hybrids and nothing in between is just silly. [/QUOTE] I don’t follow you (and your links) at all. The Renault Logan is the replacement for the VW Lupo? And it’s the same thing as a VW Fox? What mileage does the Logan get - the link didn’t say. And the Lupo, which got the great mileage, cost the equivalent of $17K in 1999. Eight years later, with inflation and Euro appreciation, that’s likely to be more like $25K. Your links seem to describe two very different cars from two very different engineering lineages. Either that, or I’m confused. Maybe both. ---
**Author:** ![slaphead](https://avatars.discourse-cdn.com/v4/letter/s/e9bcb4/32.png) [@slaphead](https://boards.straightdope.com/u/slaphead)\ **Post date:** [June 13, 2007, 8:25am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/97 "2007-06-13T08:25:05Z")
[QUOTE=RTFirefly] I don’t follow you (and your links) at all. The Renault Logan is the replacement for the VW Lupo? And it’s the same thing as a VW Fox? What mileage does the Logan get - the link didn’t say. And the Lupo, which got the great mileage, cost the equivalent of $17K in 1999. Eight years later, with inflation and Euro appreciation, that’s likely to be more like $25K. Your links seem to describe two very different cars from two very different engineering lineages. Either that, or I’m confused. Maybe both. [/QUOTE] VW Lupo - cheap little car that could do 70MPG with ease. VW Fox - brazilian-made very cheap car that replaced the Lupo - far cheaper despite being much more sophisticated in pretty much every way. Not available in ultra-efficient model since diesel is too cheap to provide demand. Renault Logan - very very cheap car made in Romania, that is killing the Fox in the entry level market in Europe. Meets all current EU emission and crash regs, but currently isn’t available in ultra-efficient version - best you can get is a 1.5 litre diesel that can’t manage more than 50MPG and costs a staggering $8,000 So even without making any changes to existing models you can buy a car today that beats the Prius for economy but costs less than half the price, manufactured using the cutting edge technology of Romanians-in-greasy-overalls. The major manufacturers have the technology and techniques to build an affordable 80MPG car ready and waiting to be implemented in the third-world factory of your choice tomorrow, if only consumers wanted to buy such a car. But instead they’d rather drive a two-tonne lardwagon with heated leather seats, air conditioning, power-operated wingmirrors and 16 cupholders, while bleating about how much it costs to gas it up and make the finance payments. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [June 13, 2007, 11:54am UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/98 "2007-06-13T11:54:21Z")
And that, of course is the key…consumers don’t WANT to buy such cars. Yet. Even today there isn’t really a market yet for them. However, let the price of gas at the pump keep creeping up and eventually a lot of American’s are going to rethink that equation… -XT ---
**Author:** ![slaphead](https://avatars.discourse-cdn.com/v4/letter/s/e9bcb4/32.png) [@slaphead](https://boards.straightdope.com/u/slaphead)\ **Post date:** [June 13, 2007, 4:58pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/99 "2007-06-13T16:58:49Z")
[QUOTE=xtisme] And that, of course is the key…consumers don’t WANT to buy such cars. Yet. Even today there isn’t really a market yet for them. However, let the price of gas at the pump keep creeping up and eventually a lot of American’s are going to rethink that equation… -XT [/QUOTE] They don’t want to buy them over here either, at the equivalent of $7.50/gallon… ---
**Author:** ![RTFirefly](https://avatars.discourse-cdn.com/v4/letter/r/c77e96/32.png) [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)\ **Post date:** [June 13, 2007, 5:44pm UTC](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205/100 "2007-06-13T17:44:16Z")
[QUOTE=Sam Stone] And I didn’t say otherwise. I said that markets can be hit by dislocations in the case of government action, or sudden disasters, or other events for which the market lacked information. I guess I could add things like sudden discoveries of major oil fields, or technological breakthroughs that radically change the market. For example, the ability to make gem-quality diamonds cheaply. [/quote] Then you deny saying: > [@Sam Stone](#): > > Markets don’t wait for dislocations before responding. They respond smoothly and linearly to available information. Get back to me when you’ve won or lost that argument with yourself. > [@](#): > > But in the case of oil, there isn’t sketchy information. Okay, so maybe the Saudi government is hiding something (but if they are, they’re keeping the secret so well they don’t have any rich cousins pricing up oil futures), but Saudi Arabia is not the sole source of oil on the planet. Around the world, we have extremely good information on the state of oil reserves. There’s no mystery. That’s not true, and Simmons has thoroughly documented that. > [@](#): > > And if there was a risk that Saudi Arabia was lying, the market would factor _that_ into the price of oil as well. Risk has a price. And which way does it factor it? Down or up? > [@](#): > > The markets are generally rational. Individuals may be irrational, but markets are not. If they were, there would be smart people making a hell of a lot more than 10-15% per year speculating in them. It’s extremely hard to find market prices so out of whack that anyone with a brain can simply buy in and double their money in a couple of years. The problem is, oil is only one of the markets involved in potential dislocations of people’s lives. > [@](#): > > And you’re supporting your claim that people are irrational by pointing at SUVs. That’s begging the question. Why are SUVs irrational? People respond to incentives, and the cost of gas is only one factor in the equation. If the price of gasoline stays pretty much where it is, then I suppose it’s quite rational. And maybe all those SUVs I see are owned by people who won’t be impacted by gas at $5/gallon. But it’s not the way to bet, judging by how people are reacting _now_ - by curtailing car trips and the like. What’s not irrational about that? > [@](#): > > Sorry, but they’re only going to make as many Priuses as there is demand for. It does no good to raise your CAFE numbers by building cars that no one will buy. It’s one thing to predict the future badly, but it’s another thing to predict the past inaccurately. In fact, CAFE standards _did_ increase the market for higher-mileage cars. Because auto makers had to meet fleet averages, they (as needed) lowered the prices on higher-mileage cars, and raised the prices on lower-mileage cars, so they could meet the targets. By those price changes, they increased the market for the higher-mileage cars, reduced that for the lower-mileage cars, and everything worked out. Except for the light-truck loophole: > [@](#): > > CAFE standards are responsible for the SUV - when people couldn’t buy their big V-8 station wagons any more because CAFE restrictions prevented it, they bought SUVs instead, which were classed as light trucks and therefore exempt. No, the _loophole_ in the CAFE standards is responsible for the SUV. If there had been no CAFE standards, there would still have been something equally large, powerful, and inefficient, if not more so. > [@](#): > > CAFE standards are a lousy way to decrease fuel consumption. For one thing, if you make the cost of driving lower, people will drive more. If you’re worried about people moving out to the 'burbs, forcing them into cars that don’t cost as much to commute with is only going to make the problem worse. That flies in the face of history. [In 1978, the U.S. consumed oil at the rate of 18,756,000 barrels a day. It didn’t match that total again until 1998](http://www.bp.com/productlanding.do?categoryId=6848&contentId=7033471), despite cheap oil most of the 1986-1998 period. (You’ll need to download the “Historical Data” Excel spreadsheet at the link.) In 1989, for instance, U.S. oil consumption was still down nearly 10% from 1978. CAFE standards were _effective_. It’s a shame that the SUV loophole wasn’t closed in the early 1990s like it should have been, and that fleet average requirements weren’t increased further. Because they _worked_. > [@](#): > > A much better solution is to simply put a tax on gasoline, and then let the people decide how much they want to spend and how much they value their SUVs. There’s a moderate amount of political support for higher CAFE standards. But higher gas taxes are viewed as political suicide. Not to mention, how big would these taxes have to be, to make a difference? Gas prices have fluctuated about $1 over the past year, and have had some effect on overall gasoline consumption, but it hasn’t exactly been earthshaking. How big a tax would it take to reduce consumption by 10%: $1? $2? $3? Nobody really knows - but there’s no way even a $1 tax would get through Congress. You know that, I know that, everyone knows that. So that’s not a realistic proposal. > [@](#): > > Absolute nonsense. Governments are _terrible_ at thinking ahead. They’re a hell of a lot better at it than crowds are. Government’s thinking ahead has brought us Social Security, Medicare, environmental protections that on balance have been very good and almost invariably cost far less than industry-funded alarmists (the free market at work!) predicted, and a host of other things that most of us wouldn’t want to live without. > [@](#): > > Do you really think a few hundred elected officials are really qualified to make the best decisions regarding the technological tradeoffs of auto engineering? Please. “Please,” yourself, bucko. We can look across the pond at Europe, and see what’s _already driving down their roads_. Boy, that took an advanced engineering degree, right? > [@](#): > > Do you think the government is investing big in bio-fuels and forcing CAFE standards because that’s the smart thing to do? No. They’re investing in bio-fuels because a few powerful senators come from states that have big agri-businesses. It’s pork in the guise of environmentalism. Do you think they favor CAFE standards because that’s the best way to make our transportation infrastructure more energy efficient? No. They favor CAFE standards because the people want them to ‘do something’, but they don’t want their taxes raised. So as usual, the government figures out a way to push the problem off onto someone else. I’m not going to argue for and against biofuels, but as I’ve pointed out already, _CAFE standards are effective._ I guess we’ll find out. If oil really goes to the prices Simmons says it will, then I’d guess demand will be very, very high. If it doesn’t, it won’t. > [@](#): > > The people who matter know all about them. The investment banks, the retirement fund managers, mutual funds… Those are the people who move markets, and they spend billions on expert analysis and research to make sure their money is invested where it can do the most good. You’re right - how nonexperts respond to oil prices is unimportant. :rolleyes: > [@](#): > > If the price of oil jumped to $300 tomorrow, demand would drop. Oil inventories would increase… And the futures price would come down. Gee, **Sam** - wouldn’t that all be factored in to the initial increase? Seems you’re contradicting yourself here. > [@](#): > > Also, holding that oil takes resources, It’s _in the ground_, waiting to be pumped out. What resources does it take to let it sit in the ground a bit longer?? > [@](#): > > Anyway, if it were that simple, and the claim that the Saudis know that they don’t have as much oil as they claim to have is true… then why aren’t the Saudis cutting production and hoarding their remaining oil until the price skyrockets? Geopolitical reasons, perhaps? We’re pretty much committed to stand behind the House of Saud as long as we depend on them for our oil supply. They have enemies within and without, but they know they can count on us, because we need their oil. They don’t know how our policies towards them would change if we didn’t view them as the ultimate guarantor of oil supply. > [@](#): > > There are lots of ways people could cut back, short of losing everything they own and going bankrupt. For instance, car-pooling would become a much bigger deal. Family outings in the car would be decreased. People would turn down the heat in their homes. Employers would find it advantageous to allow more people to telecommute, or to locate branch offices in the burbs so their employees don’t have to travel so far. Home deliveries and online shopping would gain a competitive advantage over driving to shop. Energy-intensive hobbies and sports would diminish in popularity. Those are all short-term changes that could be applied tomorrow to cut energy costs, if people had a real incentive to do so. True. And some people will go bankrupt anyway. If you have a $450K mortgage on a $500K house in the outer 'burbs whose value drops to $300K, and your job goes somewhere else, all the carpooling in the world won’t save you. > [@](#): > > And I think you’ll find the economy is a lot more robust than you’re giving it credit for. Here in Edmonton, the average housing price has jumped from $150,000 to $440,000 in five years. Yet the economy is still humming right along. Booming, in fact. People adapt. I’ve never heard of a _rising_ housing market interfering with the economy; quite the opposite. Don’t you know that? When housing prices triple, it’s like free money for everyone who _owns_ those houses. People can borrow more money off those houses, which puts money into the economy, and people build more houses, ditto. And here you are lecturing me on the market. Please. > [@](#): > > Sure. I said governments cause dislocations. The CAFE standard is a perfect example. When CAFE standards were first imposed, the auto industry wasn’t ready for them. The result was a decade of crappy cars. Can you produce some evidence for this? I remember plenty of crappy cars and planned obsolescence (Remember that? You didn’t hear that term anymore in the 1980s) _before_ the CAFE standards. > [@](#): > > Now you’re talking nonsense. I have no idea what point you’re trying to make. If you’re saying that the general population is too stupid to factor the price of gas into their purchasing decisions, well, you’re wrong. Witness the collapse of the large SUV market when oil spiked in price, and the rapid rise of the smaller, more efficient cars and hybrids. People respond to incentives. Always have, always will. It’s one of Mankiw’s tautological rules of the market. My point is that people will factor _prices they’ve already experienced_ into their purchasing decisions, sure. BFD. But they’re lousy at factoring _next year’s_ circumstances into their buying decisions. > [@](#): > > How long does it take you to decide not to drive to Grandma’s? Or to watch your lead foot in traffic? Or to decide that maybe you’ll combine those two trips to the store into one? Or to negotiate with your boss to let you work at home one day a week to cut your gas consumption by 20%? How long does it take to lose that negotiation because the policy is companywide, and your boss can’t make that decision any more than you can? How long does it take you to still spend thousands more on unavoidable travel, even after doubling up on trips to the store and whatnot? > [@](#): > > In the medium term, how long will it take companies to realize that if their employees are spending $500/mo for gas to commute to work, they have a powerful new negotiating tool against their competitors? Think they’ll care, if the job market’s tilted their way? > [@](#): > > Or for job applicants to start paying more attention to how close the job is to home or to mass transit when making a decision where to work? If they’re already in the 'burbs, they’re kinda stuck unless they get lucky, since 'burb-to-'burb commutes are generally long, and not well-served by mass transit. People are still going to have to live where the houses are. > [@](#): > > There are millions of ways the economy can adapt in the short, medium, and long terms. Oh, absolutely. I’m not talking about _the economy_; I’m talking about _people_. I remember hearing a buncha times last fall from the wingnuts that Republicans needed to get the word out about how well “the economy” was doing, because people didn’t seem to realize it. Their theory was that the Liberal Media was saying bad things about The Economy, and distorting everyone’s perceptions. Apparently they forgot that everyone experiences a slice of The Economy on their own, and apparently a lot of people weren’t experiencing The Economy as measured in the GDP or the Dow Jones Index, hence were of the opinion that the economy wasn’t being managed very well. > [@](#): > > And no one with any money to invest seems to agree with him. He’s a lone voice in the wilderness. But if you’re so sure he’s right, why aren’t \*you investing in oil futures? They’re your road to riches, man. 1. If you care to read what I’ve said, > [@RTFirefly](#): > > I don’t know for sure that he’s right, and I’d love to see the best possible counterargument to the case he makes. 1. You responded to this quote, so I know you read it: > [@RTFirefly](#): > > Having had no idea until earlier in this thread that there were oil contracts of that term [Previous page](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205.md?page=4) [Next page](https://boards.straightdope.com/t/a-crude-awakening-the-oil-crash/407205.md?page=6)