Hi,
This link below is from a story CNN Money ran this past September.
Is 5 the new 3?
“Why $80 oil won’t mean $3 gas”
Experts say declining demand, cheaper blends will keep gasoline prices from following crude much higher.
http://money.cnn.com/2007/09/17/news/economy/gas_prices/index.htm
Given that one day the Saudi oil fields are going to run dry - just like the oil fields in many parts of Texas ran dry in the late 70s, early 80s (each field has a certain pressure inside required to release the oil to the surface - excluding water flushing techniques which actually damages the wells, it alas isn’t as simple as just drilling more holes into an existing field to boost production). I only expect crude oil prices MIGHT peak a few months/years after Opec declare a CUT in production.In todays market, if the Saudi’s actually stated that there main field was close to peaking, I dread to think how high crude could go - $600+ a barrel price spike would be far from impossible.
It’s unfortunately when Opec use words like they won’t raise production till their cartel meeting in September.. it alas gets much more interesting when they eventually use the words they CANNOT raise production…
A long way off the peak, but back in the hear and now I wouldn’t be surprised if after September (possibly post US elections) the price doesn’t do a politically inspired drop for a month or two.. 
Oil will peak somewhere before but close to $200 per barrel, gasoline less than $10 per gallon, and natural gas less than $20 per million BTU. This will probably be the last spike, as people are now getting very serious about conservation and renewables, which will ultimately, permanently replace oil, gas, and their derivatives.
So, make your next car a 4-cylinder (or less), biofuel-capable one, and get creative about cutting oil consumption any way that you can while we bring on the replacements for oil.
Paul, thank you for your answer. I had read all your article, not only the first sentence. I re read it again and some parts are not fully clear to me. But apologies if I over reacted.
To come back to the debate, I agree with you that demand is the main factor driving prices. But a weaker dollar (result of the FED policy) is also a reason for higher prices, as clearly pointed out in your article by the US economist for swiss re.
In the end, I understand that you did not want to “blame” Europe. But thinking that Europe will bring a relief for oil prices may prove wrong as well, i.e. I am not sure the good news for the US consumers will come from Europe:
1. too many people are convinced that the ECB will eventually cut rates but this is far from certain
2. even if the ECB does cut rates, will the dollar go up “mechanically” (because of a smaller interest spread), or have certain investors lost confidence in the dollar overall anyway?
3. the impact of a European recession would probably be relatively modest on oil markets (european economies less dependent on oil, milder recessions in Europe in general, europe = smaller part in the overall world consumption compared to Asia and the US).
Eric, I suggest that you move on from the first sentence and read the rest of the article, specifically these two paragraphs.
“But a funny - and, dare I say, encouraging - thing has happened in recent weeks. Even though oil prices have surged to new highs, the dollar has actually strengthened. What’s more, the price of gold, another key inflation gauge, has fallen dramatically.
With that in mind, there may be something to be said for the notion that speculators aren’t really the main culprit driving oil prices higher. Instead, demand outside the United States is getting stronger.”
I say that it would be tempting in the first sentence and then go on to debunk that notion. I’m not blaming the ECB. I clearly say that the weak dollar and speculation isn’t the main cause for the spike in oil but that rising demand is. I then go on to say that if economic growth in Europe slows, that could lead to eventual rate cuts, lower demand for oil and hence lower prices. But I’m not blaming Europe at all.
I don’t mind if people disagree with me. Healthy debates are what makes markets great. But please at least do me the favor of reading the entire story instead of tripping up on one sentence and making blanket statements. Also, if you’ve been a frequent reader of my column, you’d know that I’ve been highly critical of the Fed for aggressively cutting rates in the face of inflation. And I end this column with another warning to the Fed that it should consider raising rates soon.
PRL
I usually do no post on these forums because I don’t see the point. There are a lot of interesting things in the internet, and a lot of dumb ones as well. Overall, it seems there is a balance.
But his article is probably the dumbest I have read in the last 2 years. I had to read your first sentence three times to make sure I was not reading it the other way round! Quote: “With oil prices gushing above $126 a barrel, it’s tempting to blame Europe for this inflationary mess”…
Basically, blaming the high oil prices on Europe and the ECB is beyond ridiculous. What about the FED’s role during the last 5 years??!! Wake up please! I fully agree with Chris (Sparta, NJ) post below. Even the most patriotic guys on Fox would not dare writing this. I suggest you go back to your economy courses and would suggest: Austrian economics, monetarism/inflation, Ludwig von Mieses etc.
the energy markets aren’t as simple as nearly all of us think. All forms of energy — nuclear power, coal, oil, gas, solar, etc. — are partly fungible [capable of replacing each other].
it follows that you have to deal with the entire energy complex all at once and stop fooling with only one small part of the whole thing.
Atm, the cost per kilowatt-hour of adding new capacity to America’s energy grid is approximately as follows: nuclear $1.40, coal $2.40, oil/gas $6.40, solar ~$19.00, wind ~$12.00
yes, each form of generating added energy has drawbacks. What is supposed to happen is that we debate the relative evils of the drawbacks and make a decision on how to generate the added energy we want over the next 20 to 50 years.
[That we want more is not a choice -- America WILL HAVE more PEOPLE -- they've already been born and the numbers of the next generation to be born are fairly well known because families and women do not change their fertility habits overnight.]
Given the reality, the only choices are to either produce more energy via one of the first three means listed, or force Americans into a decades long recession during which our children will have no realistic chance of living better than their parents (which, of course, isn’t politically possible no matter how much the green lobby screams about our consumption).
De facto, America’s policy has been to import oil and gas that are produced elsewhere and burn them here.
This has the effect of exporting high paying jobs in the oil and gas extraction industries, and the industries that build o & g equipment, and sending them to Venezuela and Saudi Arabia. D’oh!!
And Ohio wonders where the jobs went. Younger guys who might have worked in oil and gas extraction in America tried to get jobs in manufacturing because oil & gas extraction wasn’t hiring. With the sudden run up in price, oil and gas extraction can’t hire enough trained workers — there aren’t any more with training because we wouldn’t let them work and learn here.
Meanwhile, a recession has struck homebuilding which “should” be good news for industrial construction like building nuclear power plants — labor is available again. Alas, it takes America 10 years to grant all the permissions required to build a new nuke plant even if the site is already permitted [as a number are].
***
Aside for the solar junkies: you need to bring the price of solar down to 25% of its present cost — at least. 12% would be even better.
However, no one anywhere in the world has enough experience with trying to do that to even begin to guess reliably as to whether it is possible, much less when it will be common place. New technologies can NOT be invented on command — or humanity would have cheap fusion power already (we’ve sunk tens of trillions into that over the past 50 years to no practical result).
For now, solar power is a pipe dream. It will become economic, if it ever does, only after decades of research and investment and unknown numbers of new inventions as yet not thought of. Btw, rural areas and low energy density use locations will be the first places it’ll become cheap enough, so urban areas and high energy density users will still need the electric companies for a long time to come.
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Nuclear power being far and away the cheapest over the next few decades, America needs to get off the dime and solve the remaining issues.
Maybe Nevada doesn’t want to be the waste repository. That’s ok by me.
Let America solve this the capitalist way — any state or Indian tribe that controls a safe enough location can bid for the job. Bids begin at $100,000 per family annual subsidy for all residents of the political area for the entire life of the project, are paid by perpetual user fees on the rest of us, and lowest bidder takes the deal.
If that is Nevada, great. If the Apache tribe of SW New Mexico wins, fine. If the Upper Peninsula of Michigan wins, wonderful.
***
Let’s stop spinning in circles and get on with the job — America needs more energy which means we need to produce more. Allowing foreigners to dictate to us what the dollar and/or political price of that energy will be is foolish.
It’s not the car companies, it’s the consumers. They make those big gas guzzlers because that’s what people want to buy. Put the blame where it really belongs, on consumers. That can be solved with a simple luxury tax on vehicles with more than four cylinders. Even now, foreign car makers are doing well on sales of smaller cars, while sales of larger vehicles have declined over the past three years. At least we got that small bright spot out of this.
Actually, the method of shale extraction you are referring to is the SITU method and it is one of several methods used. It uses the most energy, but it can be done using solar power for the heater elements. Water consumption in oil shale and tar sands is a far bigger concern.
China is already losing some market share to S. Korea, ever heard of companies like LG? You can’t sell if no one is buying. Governments don’t dictate economic growth, that’s not how economies work. If it was, we would not be having trouble ourselves. A hundred years of economic trends are a better indicator of future performance than you give credit for.
Those oil reserves you dismiss are some of the largest ever found. Enough for decades using the current projections of consumption. And why wouldn’t we have natural gas and nuclear to support the use of coal?
Bomb Iran? Bush will not be able to do anything like that under the current congress.
you want to blame someone, blame ford, chrysler and general motors. when gasoline went up in the 70s they didnt listen, even today they dont, still building gas hogs like SUVs and vehicles like the Hummer which are military vehicles. Stop them from building and selling vehicles that get less than 25mph city and the problem will be partially solved. If necessary re-inact the rationing we had in the 70s to slow down the consumption
Oil will go down before hitting US$ 200, but it will never go down below US$ 80. By the year end, demand will go down, and in 3 years, oil supply and demand will be flattened. Oil will be burnt less and will be consumed not in forms of fuel but in forms of materials needed in constructions of buildings, vessels, and appliances.
Solar power will rise, alongside with water consumption.
LOL ok you do understand about shale oil you need to heat the dirt to drive the oil out of it. This involves burning 1/3 of the oil trapped in the shale oil to get 1 barrel of oil. Take about CO2 emissions going through the roof.
As to China slowing down not in our lifetime. China is a dictatorship which can tell it’s economy to do anything it wants. Right now it wants 1.2 billion Chinese people to live better than the U.S. so they can prove their system is better than ours.
What or Who is going to stop them? If anyone in their country gets in the way they will merely shoot them. China no longer needs American money. They have enough industry now to keep going without us. China is not going to slow down.
Also as to new oil fields in Brazil and off the coast of Cuba so what that will not even begin to replace the oil field losses in America, North Sea, Nigeria, Iran, Iraq and Russia. Dream on if you think those places will even come close to the fields we have pumped dry since the first oil well. Plus the Chinese will have all our money by then so they not us will buy it.
Switch to coal? Our 200 year supply now becomes 33 years without oil and gas and nuclear to support it. Not to mention the CO2 emissions. Nuclear we only have 25 years plus no where to put the pollution.
Time is very much running out on the world as we know it.
Oil is never going to be cheap never again.
And we have not even mentioned what will happen to middle east oil once we bomb Iran which Bush will do this summer to stop their nuclear bomb.
We have burned through half of our oil and more than half of our coal. We only have energy left for maybe another 100 years, 25 if everyone in China lives like we do. So what are our grand children’s children going to do.
And just think our power grid is already over loaded what will happen when we add 300 million cars to it?
Baring some catastrophic event, oil will peak around $140/barrel and about $4/gallon for gas. The main driving forces are China and India, whose subsidies of oil and gas have kept it cheap for their people. Both are already starting to back off of those subsidies. Several experts had stated that China will suffer a post-Olympic economic slump, as every country that hosts the Olympics has. This will stabilize and possible lower demand in China this year.
The newly discovered oil fields off Brazil and Cuba will begin production next year, bringing more supply. Saudi Arabia and others in the Middle East are working to bring new fields online this year. OPEC has said several times that there are no buyers for additional oil and that is the reason they are not increasing production as of yet.
With new oil production set to come online and some nations already slowing usage, prices will rise little, stabilize then fall. I wonder what will happen when the oil shale in Colorado comes online. Like the tar sands of Canada, it’s a non-conventional oil. And more new oil. Sorry Karen, the sky is not falling.
Using current price of gasoline of $3.61 per gallon, there is the potential that gasoline price may reach $4.51 per gallon by the summer driving season. My analysis here:
http://riskyops.blogspot.com/2008/05/high-risk-of-price-of-gasoline-rising.html
well karen, that’s a rather bleak and dare i say cynical view of how things will work out. car companies will be increasing fuel efficiency on vehicles more and more as time goes on. toyota already has the Prius which gets in the 40s and you have to believe that with its success everyone will be looking to replicate and surpass that. let’s also consider cars like the chevy volt that will be abel to go 40 miles without burning any gas and combine that with fuels like ethanol and hydrogen to power it when it does use the engine to recharge the batteries. sure you have to plug it in, but that brings me to my next point.
we have more than enough coal to meet demand for the next 200 years. solar, geothermal, and other alternative sources will continue to improve. what will really help is for people to be less afraid of nuclear power. we have so much uranium and a power plant uses around 25 tons a year. compare that with the supply and we will have ample energy for the foreseeable future. by the time we run out of coal, natural gas, oil, and nuclear power, there will be many other new forms of energy. i think we will be safe from the dark ages.
Well, if the reduction in demand for oil is the solution to reduce cost, why wait for Europ to slow down. Can the US slow down also?
Karen, U r so right. Oil prices will never peak, they will simply keep drifting higher and higher. The %
increase will certainely get smaller tho as we hit a price level where other sources of energy become more competative. I’m guessing that will happen Above the $10 a gallon Level. In countries where gas is $8 a gallon, they are still using gas power engines for their cars. We simply need to change our ways.
Yes, gas/oil is going higher and higher. 2 yrs ago we approaching $3 for gas. Now its $4. 2 yrs from now, we will be approaching $5. We have reached the tipping point. But I have prepared. In the last 12 months, I have put 4200 miles on one car. In the last 8 months, I have put 4400 on another. I laugh at all those who are trapped by this.
Blaming the ECB on high oil is foolish. It is OUR Federal Reserve that has cut rates, injecting money into the system. With too much money to chase too few resources, prices go up. That’s essentially the definition of inflation. Just because the ECB has had the courage to hold fast and defend against prices and our central bank was dumb enough to ignore the rise in commodities, doesn’t mean it’s the ECB’s fault.
The Fed is too dumb to realize that the Core Inflation statistic is no longer meaningful. Back in the day, food and energy was excluded from the CPI/PPI because the prices in both were too volatile. Sometimes they were up, sometimes down. Now, they’re only up, and they’ve only been up for a long time. It’s time to wake up and consider these costs in inflation. The ECB does. Why aren’t we smart enough to?
It will continue to climb, albeit in a non-sustainable manner, until we stop blaming the oil companies for an environment created by Goldman Sachs, Merrill Lynch and the other paper traders. Get the investment banks out of a market where supply is tight with a finite product and the market will rationalize itself.
LOL as we have already burned thru half the world’s oil in a hundred years and are on track to burn thru the rest in the next 25 years, Oil prices will never repeat never go back down until we develope a different alternative energy source.
Without oil and the power it brings life as we know it is gone. TV or cell phones forget it without oil,gas,coal and nuclear power we have only hydroelectric, wind and solar power for 1 percent of the people in this country and quess what you probably do not make or have enough money for that power.
Jet travel to europe is gone, good luck waiting up to six months for the trade winds to be right for travel and then a 3 month wait to travel.
Each American lives better than kings did a thousand years ago because of energy we each use the same power in oil as 12 human slaves. Forget about traveling 30 miles to work you will have to work within walking distance.
Forget about everything you know about living. The Dark Ages were not called the Dark Ages because it was dark it was because they had no energy source other than animal and human power.
How valuable is oil? Even at $1,000 a barrel it is a bargin.
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The most sobering voice in all of this is Matthew Simmons, the oil industry investment banker and presidential advisor: We’re either past or near peak oil production according to Mr. Simmons. Wait…What? Past or near the peak? Reflect for a moment on what it means for global oil production to peak while demand from China and India will only grow as they industrialize and seek to emulate America’s fascination with the automobile. Too scary, huh?