Here's the deal. World consumption is in the neighborhood of 83 million barrels per day. World production is around 85 million barrels per day. Excess production capacity (how much more could be pumped right now) is about 1.5 million barrels per day. Barring divine intervention, the considerable capacity of Iraq will not be coming online anytime soon, thus the excess capacity is not likely to change much any time soon. So, (surplus plus excess capacity) divided by (surplus plus current production) times (100 percent) is less than two percent. If demand for oil increases much more than this sub two percent figure, there's going to be a serious bidding war. In the seventies, people held each other up at the pump for a gallon of gas. In this age of the H2 because I deserve it, I don't think it will be much different, unless it's worse. You see, economists have a fancy word for the demand of stuff like oil. They call it inelastic. Run low, and the price skyrockets. The Chinese have intentionally cooled off their economy, but they're still having car shows. The US, well, a SUV is a god-given right, apparently. Two percent growth ain't much in the grand scheme of things. Anyone care to guess when oil's gonna break $100 (probably about 0.3679 Euros, or half a yen, for our viewers with assets in currencies that do not enjoy a petrodollar premium)?
If you have any problem with the numbers I've presented here (admittedly from memory), please let me know, and I'll revise them. I doubt they're too far off the mark to make any substantive difference in the argument.
4 comments:
That supply equals demand is not an unusual event. I dare say that just about any commodity, including gummy bears, would suffer this same "phenomenon". Go back twenty years and you will see that roughly the same situation existed. Excess capacity or immediate reserves may be relatively smaller but this is more a function of technology and the modern age with zero to low inventory. Excess capacity, especially in the oil industry, costs money.
The hold-ups in the 1970s were really a result of two ignorant presidents, Nixon and Carter, who thought that price caps would solve the problem. While a populist move (like Social Security), it had very little support among real economists who knew that price caps would lead to disaster. To this day, people still blame the embargo and not silly government policies. When Reagan came into office, one of the first things he did was remove the price caps. Many non-economist ignorami predicted disaster. Old Ronnie proved them wrong when shortly after, prices came down!
In 1980, Julian Simon (good guy) and Paul Ehrlich (ignoramus) made the famous bet over whether the sky would fall when all "known" reserves of certain materials, such as oil, would run out. Simon won the bet.
Lastly, as to the state of oil, Odum at the University of Florida, has already shown that we reached the "peak" of production in the mid 60s based on the actual energy yield on oil. Since then, we've had to chase oil that is deeper and deeper and yields less and less energy. However, our efficiency has increased faster than this decline. If one day, oil does run out, we will only soften the blow by allowing the free market to work, resisting any populist socialist commie frenchie "fix".
Supply more or less equalling demand is what commodities and efficient markets are all about. But you know that.
Increasing excess capacity costs astronomical bucks or getting lucky (find new reserves). What is creepy is that the oil industry is starting to freak about what it costs to just hold what they got.
Diddling with things like pricecaps is, of course, boffo. Wouldn't recommend it.
So, if it's getting increasingly expensive to just hold what we've got, and we don't bring Iraq online soon, if we see a 2% demand increase without being able to expand the current capacity, it's not unreasonable a fairly sharp spike in oil prices. With something as inelasitc as oil, futures bouncing from 40 to 120 bucks would not be terribly surprising.
You say, we're never going to see 100?
I'm sure you could go back 20 years ago and there would be doomsday articles about $50 dollar a barrell oil. The price of oil is something dictated by the market, It's not something we really have control over, unless we want to start nuking countries who use too much of it.
The nature of the world is such that prices do not just jump up and down unless governments start meddling with the market. That's because demand and supplies do not typically jump around. They tend to gradually change. As such, markets will adjust, gradually. Certainly, events may happen but it doesn't pay to plan for the worst. You plan for reasonable scenarios. You try to make your economy light on its feet, like Mohammed Ali, and the best way to do that is to let market forces act as much as reasonable.
Right now, China accounts for the large increase in oil consumption (as well as the rise in cost of other commodities). They will most likely demand more oil and they will have to pay a lot of money for it. We'll also have to pay more for it.
But when you look around, we don't pay near the amount that some countries pay for their gas. Furthermore, the recent rise in gas prices did not mean a recession, as many (ignorami) predicted. That's because oil is kind of a zero sum game. If they (oil producers) charge more, they'll have to pay more for the products that we (oil consumers) produce. The bottom line is that more oil is flowing into the US and we are using it more efficiently than ever. This means more products and more energy. Prices are relative. And we should also remember that almost half the recent price rise was due to self-inflicted pollution controls (some fairly dubious).
What we should do is position our country to always be on top of the wave. As many surmise, the party doesn't last forever and, in fact, the lights may be dimming even now. However, we won't help ourselves by imposing false restrictions, especially ones that only make the US pay the pain, like the mugging of the US known as Kyoto, where everyone gets some type of alliance except the good ole USA.
Markets and entropy will sort all this stuff out -- eventually. Question is, while we have access to this unique cheap source of highly concentrated energy, should we start building an infrastructure for a post oil economy? Sure, there will be oil for missiles and jets for the elite 200 years from now, but what about for tractors? Matthew Simmons, hardly a tree-hugging Kyoto-wielding cheese eating Kerry groupie, called upon the Congress to start an Energy Marshall Plan. I don't agree with all of what he proposes, but he makes some points worth considering.
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