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| Thu May 8 21:37:23 2008 Bad Gas |
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| Thu Apr 24 22:06:59 2008 High Oil and Gas Prices |
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| Tue Apr 15 22:13:14 2008 Peak Oil |
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| Thu May 8 21:37:23 2008 Bad Gas A bad idea that will likely make the problem worse. |
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| I've been reading a lot lately about the supply and demand of oil, and the
impact on gas prices. (See
High Oil and Gas Prices and
Peak Oil, for instance). In the 1970's, high gas prices made
consumers buy more energy-efficient cars, or back off on buying new cars
altogether. And the same thing is happening now.
Chrysler has gotten worried about that (not surprising, given their double-digit sales declines). In response, they are now offering a guaranteed price of 2.99 per gallon for 3 years. That way, you can buy a car with low gas mileage, but not worry about your fuel costs exploding in the future. They have a few caveats. They don't let you buy more than a certain amount each year. Premium gas costs a bit more. And they have attempted to limit their own exposure by "using a hedging strategy." Practically, that can only mean they are placing orders for options to buy gas in the future at limited prices. The idea is that consumers don't have to worry about gas prices anymore, so people can go on buying cars again as if gas was still cheap! And as the article notes, "...other carmakers will be watching the program closely as everyone grapples with the negative effect of fuel costs on sales." Chrysler may make some money in the short term, especially if they are the first and only to market for a while. It could be a way to shore up sales while they update their product line with more gas-efficient models. But in the long term, this is a bad idea for everyone. The high cost of oil doesn't go away. Chrysler can hide it behind slightly higher auto costs, or pass it on to other speculators via their hedging strategy. But if oil costs keep climbing--and they probably will--then eventually Chrysler won't be able to buy the options necessary to fund the program. Given the uncertainties in supply, I suspect 3-year gasoline options will become expensive very fast, especially if multiple automakers want to buy them in volume. So as a gimmick, this could work in the short term. But it just means more people will buy less efficient vehicles for a while longer, and that will ultimately push gas prices up even more. Comments |
Related: economics > energy < Unrelated: books environment geopolitics lists mathematics predictions science |
| Thu Apr 24 22:06:59 2008 High Oil and Gas Prices More dubious questions about high oil prices. |
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| In my April 1 post I talked about how the US Congress was grilling oil executives about their profits. Now it's local! Two Washington congresspeople, Senator Cantwell and Representative Inslee, have asked President Bush to set up a special task force to investigate the high prices. They claim "the price of oil and gas can no longer be explained or predicted by normal market dynamics or their historic understanding of supply and demand fundamentals." Oh really? I've given links (April 1, April 15, March 26) to multiple indications that world oil demand is climbing while supply (oil production) is staying flat or falling. On top of that, the US dollar is very weak, which doesn't help us in the global market for oil. High demand + falling supply + weak dollar = high prices. I'm guessing Cantwell and Inslee are frustrated because the price of oil is unrelated to the cost to produce it. But that's not unusual either: any time that you have high demand and limited supply, the price (value) of an item is only slightly related to the cost to produce it. One recent example (for water prices, not oil) was when China poisoned the Songhua river and the spill was carried by the river through multiple large cities and into Russia. Almost 4 million citizens of the provincial capital Harbin had their water supplies shut off when the authorities realized that the 100 tons of leukemia-causing benzene might be dangerous. Without water supplies, people started buying bottled water, which led prices to skyrocket. Obviously, bottled water isn't very expensive to produce, so the fact that prices shot up led to charges of "overpricing" and "price gouging." (See the USA Today story and the IHT story.) Also see this link for many on-the-ground anecdotes of people that went through it. The idea is that greedy store owners started charging more for bottled water when it was announced that tap water was poisonous. Therefore, they were profiteers and price-gougers. I only have one problem with that: the value of their water did go up! How much would you pay for a bottle of water right now? Probably not much if, like me, you are sitting only steps away from a perfectly good water tap. Suppose you were told that the tap was shut off or poisoned, and the entire city's water supply would be shut down for a week. Now how much would you pay for that bottle of water? I'm guessing you'd pay more. You'd probably pay a lot more. Suppose a citizen of Harbin wanted to celebrate someone's birthday with a monster slip-n-slide like these guys. Before the disaster, great. But after it was announced that the city's water supply had been poisoned, wouldn't it be irresponsible to hoard hundreds of gallons of water for your slide? I think it would be irresponsible. And isn't that an indication that water is worth more? [Scary aside: the government knew about the crisis for days before it told anyone! At first, it shut off the water supply without telling people why. Government officials also apparently told local bottled water producers to prepare days ahead of any official announcements while the benzene was drifting downstream. So the "price gouging" could have been far worse if the government hadn't acted--somewhat immorally--to jack up supply ahead of time.] Anytime there is a scarcity of a needed item (water during a drought, food during starvation), the value of the item--and therefore its price--goes up. And the effect can be nonlinear! Just slight imbalances in supply and demand can result in large price changes (especially for inelastic supply such as oil). So I have to believe that the current high prices are explained pretty well by classic supply and demand curves. And the prices will just get worse as demand increases (or stays high) while supply continues to fall. Senator Cantwell and Representative Inslee will remain confused and frustrated for many years to come. Hopefully other members of Congress will do something productive to reduce the demand side of the equation. Comments |
Related: economics > energy < Unrelated: books environment geopolitics lists mathematics predictions science |
| Tue Apr 15 22:13:14 2008 Peak Oil So when will the oil run out? |
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| In earlier posts (Apr 1 and Mar 26) I mentioned that oil prices would go up because demand would increase while supplies ran out. Reading some of the links, I started asking myself: "When will the oil really run out?" And then today, it was announced that Russian oil production declined in the first quarter of 2008. Maybe it's a trend? Some people think that the drop in Russian production is a short-term decline, but other articles claimed that the drop could be because the oil is running out. One Russian oil executive has claimed that "the period of intense oil production is over" and last year's Russian production was the most he would see "in his lifetime." Dire stuff! Could that happen across the world? For instance, will we see gas rationing in our lifetimes? Figuring out when the oil disappears depends on three things:
Worldwide Oil Consumption How much oil does the world use? It turns out there are decent statistics on that. For instance, there are many statistics about US oil consumption from the US Department of Energy. There are a lot of breakdowns of how much oil and petroleum products we produce and consume. We consume a lot more than we produce--no surprise. Of course, the oil market is global, so the US picture isn't enough. There is good information about world oil consumption from the CIA World Factbook. The summary? In 2005, the world consumed close to 30 billion barrels of oil. The US led the list with 7.5 billion barrels--that's over 20 million barrels a day. Determining the increase in consumption is difficult. The US has actually started flattening out. I think a few years of high oil prices are starting to affect consumer behavior. During the oil crisis of the 1970's, US oil consumption dropped by around 20%. So clearly we are able to cut consumption when needed! However, the rest of the world is consuming more. China's rate of increase is over 7% per year, and India's use is also growing at over 5% per year, according to The IAGS. So determining yearly growth is tricky. Based on historical data, I picked a yearly growth of around 1.5%. But that is probably on the low side. Worldwide Oil Reserves Okay, the world consumed 30 billion barrels in 2005, and we consume about 1.5% more each year. How long will the oil last? It turns out reserves are hard to determine. There is a lot of discussion about reserves, with several people noting that many countries suspiciously jacked up their stated reserves without any clear explanation. (See another example here.) I'm using a value of 1 trillion barrels of proven reserves, since that seems to be generally agreed upon as a minimum and is also the figure given by the Department of Energy. There may be more oil in the world, but it is generally believed that there are 1 trillion barrels of cheap oil. Other oil will be much more expensive to extract. Given consumption (30 billion barrels per year in 2005 with a 1.5% growth rate) and reserves (1 trillion barrels) it is simple math to calculate how many years remain. The result? The result is that we run out of oil in 2032 (24 years from now). A 3% growth rate in consumption would move that date closer to 2028. Twenty years. That's not long. But that's also not realistic. That assumes that consumption keeps growing, and production matches it. We'd keep pumping more and more oil out of the ground until everyone's wells ran dry on the same day. Worldwide Oil Production In practice, production starts declining as oil fields get depleted. According to Hubberts, any given oil field tends to have a rapid ramp up of production, hits its peak, and then rapidly declines. So the problem isn't that we run out of oil. The problem is that within a short time of hitting peak production, global production starts declining, and the world cannot possibly produce enough oil to meet its needs. And production will keep declining at a fast rate. If you add up all the oil production curves from all of the world's oil fields, you get a total worldwide oil production curve. The result is on the left for all but OPEC and Russia. As you can see, most predictions indicate that the rest of the world has already peaked (the US peaked in 1971). What can possibly save us? Originally OPEC and Russia were believed to have large production remaining, but Russia could be near their peak. So that leaves only OPEC, and no one is sure about their reserves or production capabilities. It seems doubtful that they could compensate for the world's increased demand and everyone else's production decline at the same time. Over the next decade, production should drop dramatically as oil fields are depleted, and we don't have large new oil fields to develop. The impact is hard to judge. Certainly we are hosed in 2032. The question is: will we hit hard oil shortages much earlier? Peak Oil This worst-case scenario, that we are only a decade or so away from worldwide oil shortages, is called Peak Oil. There are many believers in peak oil (such as this guy and these guys). Much of it has the ring of Y2K doomsayers! But even industry insiders like this guy think that we are close to significant oil production declines. Certainly there are people who disagree, such as this guy. But overall I am inclined to err on the side of caution. Based on all these sources, I think production will decline, and/or will become more expensive. The combination of less production, more expensive production, and increasing demand, will drive oil prices up through the roof. When will this happen? We may have a short breather, since US consumption is flattening a bit, and India and China haven't yet caught up. But I'm sure we'll see prices of over $10 a gallon (in 2008 dollars) for regular gasoline within 10 years as production declines kick in. And it will just get worse from there. Another prediction: we'll see gasoline rationing within 15 years. Start planning now! Comments |
Related: environment > energy < predictions Unrelated: books economics geopolitics lists mathematics science |
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