end of round one
Aug. 15th, 2005 02:47 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
solarbirdIt looks to me very much like we're at the end of round one of the oil spike. Barring a major incident, crude has probably peaked, and gasoline on the street will peak in another few weeks, followed by a slow decline in prices over a period of a few months. Crude has spiked past where demand fundamentals should actually have it right now, and more importantly, a bit past where demand growth should put it in three to six months, which is about as far ahead as the commodities market bothers to think.
Many people will take this overshoot as evidence, or even proof, that the concerns about any end to cheap oil are overblown. I continue to hear about how "all those capped wells in Texas" will pop right back up now, for example. And about how all there's all this domestic production we could tap if only those evil environmentalists would let us.
This is not true, by the way. Check the USGS data yourself, if you want. It's all available. And sure, there are some marginal-production wells that can be brought back online. But few of them have much left, anymore. That's why they're idle.
Regardless, oil could sink back to $55/barrel, or even reasonably as low as $50/barrel over the next few months - particularly if the US falls into recession. Falling prices at the pump are likely to end incipient concerns about gas milage and/or fuel economy for another round of automobile buying. Oil will be called cheap again, as it takes its one step back before taking the next two forward. The Summer of 2005 will be called the New 1973, in that way that the current commentariat likes to compare everything now to The Vietnam Era Of Their Youth.
I don't know how long oil's down cycle will last. However, it will only last as long as it takes for the continued economic growth of China and India - emphasis on "and India," as China faces a variety of structural problems which may slow, though will not not stop, its growth - to pick up their demand. The same applies to American demand, for that matter. The China Effect, as economists are calling it, has saved the US from the normal inflationary disaster that would have historically followed an oil spike like this one. It will likely continue to do so for at least the near future - which could, in turn, prompt this coming downturn in oil prices - this correct, more or less - to be fairly short-lived.
A great deal will depend upon how quickly and how efficiently oil shale production can be ramped up. With large-scale investment going into Alberta, that can be expected to ramp up somewhat quickly, and should help oil maintain a fairly stable adjusted-dollar trading-range for a few years whenever it does finally become a large factor. (The price-point for that remains to be determined. However, we're safely above the breakeven point of around level-dollar $50/barrel, so since there's good money to be made, it will be made.) However, even if that were to be at, say, a level-dollar $60/barrel, I think it's likely that there will be another downward adjustment in the US dollar, resulting in a slow 30% rise in unadjusted dollars over two to three years.
In completely unrelated news, I woke up and watched the milk truck pull up the street early this morning; out popped probably an eight year old(?) girl - "OMG milk maid!" - who ran up to get the list for her father, who then brought up the milk, yogurt, and cheese. It was so cute it made me grin all morning. ^_^
And here, since I hardly ever post budgie pictures; this is Oasis. She MUST KILL ALL RINGS! At least, when she thinks nobody is watching. ^_^
Destroy All Rings!
Many people will take this overshoot as evidence, or even proof, that the concerns about any end to cheap oil are overblown. I continue to hear about how "all those capped wells in Texas" will pop right back up now, for example. And about how all there's all this domestic production we could tap if only those evil environmentalists would let us.
This is not true, by the way. Check the USGS data yourself, if you want. It's all available. And sure, there are some marginal-production wells that can be brought back online. But few of them have much left, anymore. That's why they're idle.
Regardless, oil could sink back to $55/barrel, or even reasonably as low as $50/barrel over the next few months - particularly if the US falls into recession. Falling prices at the pump are likely to end incipient concerns about gas milage and/or fuel economy for another round of automobile buying. Oil will be called cheap again, as it takes its one step back before taking the next two forward. The Summer of 2005 will be called the New 1973, in that way that the current commentariat likes to compare everything now to The Vietnam Era Of Their Youth.
I don't know how long oil's down cycle will last. However, it will only last as long as it takes for the continued economic growth of China and India - emphasis on "and India," as China faces a variety of structural problems which may slow, though will not not stop, its growth - to pick up their demand. The same applies to American demand, for that matter. The China Effect, as economists are calling it, has saved the US from the normal inflationary disaster that would have historically followed an oil spike like this one. It will likely continue to do so for at least the near future - which could, in turn, prompt this coming downturn in oil prices - this correct, more or less - to be fairly short-lived.
A great deal will depend upon how quickly and how efficiently oil shale production can be ramped up. With large-scale investment going into Alberta, that can be expected to ramp up somewhat quickly, and should help oil maintain a fairly stable adjusted-dollar trading-range for a few years whenever it does finally become a large factor. (The price-point for that remains to be determined. However, we're safely above the breakeven point of around level-dollar $50/barrel, so since there's good money to be made, it will be made.) However, even if that were to be at, say, a level-dollar $60/barrel, I think it's likely that there will be another downward adjustment in the US dollar, resulting in a slow 30% rise in unadjusted dollars over two to three years.
In completely unrelated news, I woke up and watched the milk truck pull up the street early this morning; out popped probably an eight year old(?) girl - "OMG milk maid!" - who ran up to get the list for her father, who then brought up the milk, yogurt, and cheese. It was so cute it made me grin all morning. ^_^
And here, since I hardly ever post budgie pictures; this is Oasis. She MUST KILL ALL RINGS! At least, when she thinks nobody is watching. ^_^
Destroy All Rings!
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on oil
Date: 2005-08-15 11:12 pm (UTC)I also think it's likely to be short-lived. As you say, people will take this temporary drop as evidence that there's no long-term oil scarcity problem. But come winter, demand will rise again as the northern tier starts warming homes. I suspect we'll be back at $65 or even higher before the end of the year, just because of increased demand. There could even be brief shortages, particularly if people take the short-term drop in prices as a sign that they can ramp up consumption. Even a brief period of supply not keeping up with demand will surge prices. I've seen models that suggest a doubling under those conditions in a short time is not impossible. I tend to exaggerate predictions, so I'll stick with the $65 price for the end of the year, roughly where we are now. But I think $80 may be more like it.
Except for short-term over-corrections, I think $50 is the new long-term floor.
As for supplies, I haven't read anything convincing about the prospects for shale--it's too energy expensive to produce usable oil from shale for it to ever be a major source of energy. Tar sands in Alberta will be competitive soon if they aren't already, but the amount of economical oil from that source is likely to be a fraction of the total supply (six years of total world supply at current demand if you believe the optimistic projections, one tenth that if you stick to what's actually known to exist). It's not going to change the overall picture except to give us a few years of extra buffer to make a conversion to less energy-intense use of oil, or something other than oil altogether.
no subject
Date: 2005-08-15 11:43 pm (UTC)He also mentioned that oil usage in Japan is falling, in Europe has plateaued, but in the US is still increasing, partly due to the very low consumer pricing. (That's in addition to China/India, of course.)
no subject
Date: 2005-08-16 01:00 am (UTC)The plateau effect would probably be happening here, too, if we'd joined Kyoto. But, well, we didn't. La.
no subject
Date: 2005-08-16 02:17 am (UTC)So, why expect it to go down at all? Naively, one would expect the price to just rise and rise as demand and supply got progressively offkilter.
Is it just a seasonal thing?
no subject
Date: 2005-08-16 03:18 am (UTC)One is that oil demand isn't a constant increase. Oil use in the US spikes up in the summer, particularly towards August as people drive more during the summer, then declines (or at very least, the rate of increase slows); it peaks back up later in the year as heating needs increase.
Another is that as price climbs, some conservation will happen. People may not be buying more efficient cars, but they are starting to combine trips. Industry in particular is price-sensitive, and will attempt to find ways to use oil more efficiently, and, accordingly, cheaply. This will also push oil prices lower.
In a worse case, the price of oil rises enough that it becomes a significant enough drag on the economy that the economy actually goes into recession. This also cuts oil use, leading to lowered demand, which, eventually, leads to lower prices.
A fourth factor is that oil production is, in fact, still increasing. It is just no longer increasing enough to keep up with increases in demand. A significant economic downturn worldwide could cause prices to fall, even sharply. However, I don't think that is what anyone really wants, since, well, depressions are depressing.
A fifth (and important only in the short term, such as this) factor is that the market is, of course, made up of humans, who overreact (via misreading of data, inadequate analysis, or other plain old auction-house enthusiasm), and do so cyclically. The market is probably in a period of overbuying. Soon, it will be in a period of underbuying, hence the undershooting of the price down to a possible $50/barrel.
Finally, demand is a global factor. China and India are not very efficient users of oil, but will hopefully develop efficient uses out of necessity. The US is a very inefficient user of oil, and that probably won't improve soon, but the signatories to the Kyoto treaty are, rather by necessity, becoming more efficient as a way of reducing carbon dioxide emissions. This will reduce their rate of increase of demand for oil, and may lead to a lengthening of the price increase curve.
So all these factors, and others as well, are interacting to create something quite unlike a smooth and stable price increase.
no subject
Date: 2005-08-16 05:19 am (UTC)If it was as simple as the price going up in price as overall supply declines relative to current demand, someone could make a crapload of money in the oil futures market. It's not that simple, unfortunately.
no subject
Date: 2005-08-16 05:38 pm (UTC)