Oil prices continue to fall: Where are all the CT and Peak Oil nutjobs?

The BBQ Pit
21

Are you trying to suggest that if supply and demand is to explain a price change of 1/3, supply or demand need to have shifted by 1/3 as well? That’s patently false. In some cases, very small changes in supply or demand can result in huge price shifts. In other cases, it will take a huge change to shift prices.

The way you figure it out is to calculate to curves - one curve indicates how much demand there is for the product at any given price. So, just for example, suppose that we’d have the following demand for oil at various prices:

$50 - 95m bbl/day
$75 - 94m bbl/day
$100 - 92m bbl/day
$125 - 87m bbl/day
$150 - 73m bbl/day

The other curve indicates how much supply there is at any given price. Again, let’s suppose the following:

$50 - 82m bbl/day
$75 - 90m bbl/day
$100 - 92m bbl/day
$125 - 93m bbl/day
$150 - 93m bbl/day

The to see what the market price will be, you look for where the curves intersect - in this case at $100. Below that price, not enough oil will be produced to meet demand, and over that price more oil will be produced than there is demand for. But notice a couple things about my example - the demand curve is very steep between $50 and $100. It takes a doubling of the price to shave only a small percentage of the demand off, where as the price increases to $150 the demand drops much more sharply. Of course, these numbers are just made up, but it’s not unreasonable to expect the actual demand curve looks something like that. And on the supply side, notice that while there’s a significant increase in production when you boost the price from $50 to $100, if you push it over $100 you get barely any increased supply. In this case I’m imagining that there simply isn’t any further production capacity available at any price.

Another thing to note is that neither curve is static. In the short term, demand for oil is notoriously inelastic (which means, in economist-speak, that it takes very large price swings to modify demand). This is because most people’s gas consumption is fixed by things like where they live relative to their workplace, and what vehicle they drive. To greatly diminish their use of gasoline requires big decisions that won’t be made at once, so you have to move gas prices a lot to change demand. However, as weeks of high prices turn into months and years, people are replacing their cars and moving their residences, and the higher price will impact their choices and so very slowly we’ll see aggregate demand begin to drop, as noticeable numbers of cars are replaced, etc.

The supply of oil is much more elastic, within certain bounds. Between the old $25/bbl prices and probably about $75/bbl, there’s a very significant amount of production that swings from unprofitable to profitable. There are plenty of wells in this province that get shut off when oil prices drop below a certain threshold (which hasn’t happened for a while now, granted). But past a certain point, you just can’t pump any faster. To increase production beyond that requires huge, long-term projects - prospecting for off-shore deposits or building multi-billion dollar oilsands projects, and the like. And of course, all the while old wells are going dry or at least unprofitable at lower prices.

So, depending on where you are on the two curves, a shift of only a couple percent in demand or supply could double or halve the price of oil, quite easily.

22

IMO, there are a few peak oil folks out there who make bold claims, knowing full well it’s a longshot. I’m looking at Matt Simmons here. Simmons has predicted that in 2010, the average price of WTI will be over $200 in 2005 dollars. Now, looking at the forward curves, it’s easy to see that this is very, very unlikely. So Simmons, a finance pro, is basically saying he knows something that the collective wisdom of the smartest people in the world is unaware of.

I think he is smarter than that. It’s a Hail Mary. If by snowball’s chance he’s right, he looks like a sage. If he’s wrong, nobody will remember long, and he can probably change his tune and sell another book.

23

Since the term “peak oil” has been so thoroughly shit on by the nutjobs, we need another short descriptive phrase that conveys the geological fact that we will eventually max-out how many barrels of oil we can suck from the earth’s crust in a single year.

“Max oil output”, maybe?

24

As others have explained above, your grasp of how prices work is pretty weak. However, from what I can understand from trying to read your poorly written contributions, you seem to think that there is a cabal of evil oil me controlling the price of gasoline. How do you account for the drop in price? If these men are setting the price why would they want to lose money? Wouldn’t they just keep raising the price?

25

Gas here just went from $3.50 to $4.

I call bull.

26

IMHO, Simmons is looking awfully good so far.

He was saying he saw something most others didn’t: that Saudi Arabia really didn’t have much excess capacity, and that its oilfields, including Ghawar, were peaking.

This wasn’t just some Hail Mary, either. He brought together the bits and pieces of info about the Saudi oil fields that were scattered over dozens of papers, and saw a pattern.

A few years ago, when I first was aware of his saying this, the CW was that the Saudis could pump a lot more oil than they were pumping, and they claimed to be willing to increase production to keep the price of oil stable.

I suppose there’s an argument that Simmons was just lucky, but I don’t see it.

27

From both an economic and historical standpoint, the whole peak oil thing just doesn’t make sense. Every resource, including oil, is finite. However, the interaction between supply and demand send signals through prices to either discover or create more of that resource or find alternatives to that resource. That’s the way it works with everything and oil is no exception. Furthermore, there have been people saying we are running out of oil for around a century. Their predictions were based on incomplete data. There is no reason to think that today’s situation is any different. And when oil truly is running out the price will rise and we will switch to more affordable alternatives.

As economist Bob Murphy points out:

28

There’s no reason to think that today’s data on recoverable oil reserves is less incomplete than the data being used a hundred years ago? :dubious:

29

Yes, our data for measuring that is better but so is our technology for extracting oil. Our data today cannot take into account the future technology we will use to extract oil, so I’d say it’s quite likely our data is as incomplete as the data were a hundred years ago. Both sets of data suffer from the same problem.

30

No, not really. The data a hundred years ago suffered from us having looked in only a few places for oil. Now we’ve looked most everywhere to at least some extent. It’s true that we don’t know now what currently “unrecoverable” reserves (like oil shales, for example) will become recoverable with new technologies, but we have a vastly better understanding of what is actually out there. The sets of data suffer from completely different problems.

31

This is all true. But the flipside is that more data makes it less likely that ‘Peak Oil’ will sneak up on us. There are thousands of oil investors watching production levels, exploration levels, and consumption levels very, very closely. They’ve got hard money on the line. There are all the big companies choosing where to invest their energy dollars, where to hedge their bets on future energy, etc. All this churn shows up in the futures markets and in the long-term investment patterns of major energy companies.

Oil’s not going to suddenly go to $500/bbl. The market is going to get reasonable warning, and it will take action. In fact, this is already happening. After decades of talking about alternative energy, there is serious investment money flowing into it right now. Like, REALLY serious investment money. Tens of billions of dollars.

Look how fast the auto industry is switching to high efficiency vehicles. Two years ago, the Chevy Volt was some radical gamble on GM’s part, and other manufacturers were saying it wouldn’t fly. Today, almost every manufacturer has promised to have a plug-in hybrid on the market within two or three years.

Wind power is growing at a fantastic rate. You see wind farms all over the place now. As I predicted a couple of years ago on this board, opposition to nuclear power is melting away, as is the opposition to new drilling.

You should see the investment going on in Alberta’s oil sands. It’s straining our Province’s infrastructure to the cracking point. We’re pumping as much money as we can, and a little bit more.

I’ve always said that the transition away from oil will be a lot smoother than people think, if only we step back and let the market do what it does best. That’s pretty much happened - there hasn’t been a lot of interference in the markets so far. And things are changing mighty fast.

32

I can think of other reasons that Peak Oil won’t sneak up on us.

Why not? It went to $140/bbl pretty damned fast.

It’s pretty smooth, if your wallet can take the increase from $2/gallon to $3.60/gallon without sweating.

Not everyone’s wallet can do that. For those that can’t, nothing’s ‘smooth’ about this.

33

Growth in demand but less than expected, will result in a drop in price. Wow.

34

I agree with Airman Doors.

But peak oil isn’t just about the price of oil. It’s also about how much oil is actually being pumped out of the ground. It’s about exploration and proven reserves. You might want to get away the page one sensational stories and spend some time in the back pages where the devil is in the details. US oil production (48 states) peaked in 1970. Alaska oil production peaked in 1988-89. Oil discoveries have been on a steady decline since 1964. World oil production has been flat the last three years. Saudi production and reserves are not released by them, but oil experts say their production is less than they claim and their reserves are way less than claimed. ANWR oil production will do nothing for us. Canada oil shale will do little for us.
Here’s an analogy. Retirement is still a ways off for me. I hope the money will be there so my early retirement years will be funded by the interest and fund increases, and not the principal. As one ages, it’s time to dip into the principal so when the bucket is kicked, the money is just about gone.

With oil we are well past burning up the principal. There’s a story that’s been floating around for three years now about a Saudi oil report that was accidentally leaked. It talks about Saudi reserves and extraction methods. The overpumping done by the Saudis drastically cut their reserves because it damaged the oil fields. The Saudis have been taking large oil field out of production the past few years because they are “dead.” Not dry, but dead. The same is expected all across the Middle East.

Our society has a couch potato attitude toward oil production, use and conservation. The inevitable is not down the road a bit; it’s around the corner. IMHO, we’re gonna be at that corner before the next president leaves office.

35

Once again you demonstrate that you don’t know jack shit about the basics of economics or anything about how the oil market works.

But since you seem to have everything figured out, why do you think oil prices are coming down? If people were manipulating the prices because they are so greedy, then are they less greedy now? They just decided to be good people? In your world gas prices should be at $10 a gallon and going up since it’s just some greedy bastards sitting there setting the price and raking in the profits. Don’t post a link, I want to know what you think. If you can write it in something approximating English that would be helpful, too.

What’s “the inevitable”? We are nowhere close to running out of oil. When we actually are the price will reflect that and we’ll shift our consumption habits. The high price will also mean that there will be huge incentives to develop alternative energy. We don’t need a “plan” to deal with it. That’s what prices are for and they accomplish things much more efficiently than a few bureaucrats with limited knowledge.

36

http://www.bloomberg.com/apps/news?pid=20601087&sid=a2iltjOtTeaw&refer=home
Bloomberg article explaining why you guys remain ignorant. I would explain it to you but real information can not penetrate your wall of business can do no wrong .

37

I’ve never said that business can do no wrong. I’d like to hear you try and explain the drop in the price of oil in your own words, though. You claim that people were driving up the cost solely because they were greedy. Notwithstanding the fact that this makes no economic sense, I’d like to hear why you think they all of a sudden became less greedy. Did the speculators sell all these shares and lose a lot of money (or potential money) because they are no longer greedy? In your words, gonzo, let’s hear it.

As far as the report that Masters authored, you might want to read up on why Masters doesn’t really seem to understand much about oil futures.

38

Yeah, this Masters guy seems to talk a whole lot of cock (so much, in fact, that you have to question his motives, because he surely can’t believe what he’s saying). He accuses speculators of causing an increase in demand equivalent to that China caused in the last five years. But what on earth does he think is happening to the oil they buy? They’re not consumers like China is; they don’t burn anything, or indeed ever hold the product - the “demand” they create is not real. They may cause fluctuations in futures markets, but they have no control over the pump price; they’re simply gambling on it. If they’re left holding contracts which mature when the pump price is less than the contract price, they’ll take a bath. Their actions no more affect the pump price than my betting on the football changes the outcome of the match.

Unless of course there’s some speculator out there sitting on billions of barrels of actual oil, of course. Which there isn’t.

Here’s a well-argued Economist article which makes a similar point, along with noting that the outstanding contracts held by index funds (i.e. those accused of speculating on rising prices) amount to a mere 2% of the annual global oil market. How’s that level of speculation supposed to have effected a 50% price rise? Answer Renob’s question, gonzomax: if these naughty speculators can cause prices to rise at will, why have they stopped? Why didn’t they do it before?

39

Might also have to factor in the rise in the strength of the Dollar. Dude, you don’t have all the answers.

40

Gonzomax, I appreciate your expertise on the subject and would like to read more. Can you tell me what economic journals have published your papers? Wait, you do have models, with, you know, equations, right?

Serious questions: You do realize that if you had a good model to explain oil price movements you would be reasonably famous and wealthy, right? You might even find yourself getting a prize in Stockholm one of these days. Do you think economists are just bull shitters who sit around pulling predictions out of their asses? You realize that economics is a mathematically rigorous subject, and that most true practitioners have Ph.D.s in the field. Sure, they aren’t always right, but they have models.

Sometimes I wish I’d became an airline pilot. At least they don’t have a bunch of bozos thinking they can fly the plane better than them without any training or experience.