how long will demand destruction keep oil at bay

hydrocarbon · Coal Joined: Jul 23, 2008 Posts: 5

It seems when hi fung and his billion friends ditch their scooter for a bicycle it is having a positive effect on oil prices. The question is how long will demand destruction last, days? months? years?

Kingcoal

If oil production plateaus, then it could just stabilize around a tight range. However, if PO theory plays out, such a plateau will begin to decline, exponentially. In such a decline, demand destruction will fall behind production decline and will never catch up. The long term trend, over the next 50 years is lower and lower production.
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"That's the problem with mercy, kid... It just ain't professional" - Fast Eddie, The Color of Money

Serial_Worrier · Heavy Crude Joined: Jun 05, 2008 Posts: 233

I just can't wait for Great Depression 2. Hopefully we'll see 50-60% unemployment, rioting and overall destruction! Twisted Evil

CarlosFerreira

ROCKMAN

Hydrocarbon,

Not that one can assume the developing DD will follow the same course but there's is a fairly recent example of how it has played out in the 80's. The late 70's oil spike brought about a global recession in a couple of years. It generally takes that long (18 to 24 months) for the inflation effect to filter through the grass roots economy. As bad as it might seem now we're probably just seeing the net effect of $80+ oil.

When DD kicked in hard in the early 80’s global consumption dropped 10 million bopd very quickly. This represented about a 15% decline. As a result oil prices slide quickly. OPEC very quickly proved to be a complete failure as its members began under cutting each others prices. Oil prices would have dropped even faster had not Saudi continued to cut their production back to help support prices. Eventually Saudi gave up the effort and opened their valves wide and drove prices to $10/bbl in 1986. There’s a variety of ways to measure the global economy: GDP, oil consumption, etc. However one measures the health of the global economy it took ay least 4 to 5 years to recover with any significance. And remember: this was with $10+ oil. It can take a couple of years for the US economy to recover from a relatively mild recession. Economies move pretty slowly regardless of which direction they are going.

Let’s jump back to today. I have no idea how far DD will go with the latest price spike. I also wouldn’t believe anyone else’s guess. It’s just too complicated especially with the unpredictability of the reaction by emerging economies like China. Adding the Import Land model to the mix only makes it more difficult. There’s also one huge difference between now and 1986: all of the exporting countries (except Saudi) now admit they are at PO. Even Mexico now admits they may have only 5 to 10 years left as a net exporter. Even if DD does drop consumption significantly there may not be the fight for market share as there was in the 80’s. Even if Saudi were to increase their share of the export pie the other countries might not care to lower their asking price to compete with them. Mexico might badly need that income but they also know their reserves are running out. Why sell cheap now when they can wait and sell for more later as the world slips closer to PO. To me, this is the really scary possibility: the global (and US) economy goes into a prolonged recession and yet oil prices don’t fall nearly as much as they did in the 80’s. Under such a worst case scenario one could predict DD and recessions lasting decades. Even with such motivation it would take decades for the US to develop alternatives. And then developing alternatives will take a lot of capital…something that not usually available in a recession….let alone a depression.

Right now I see our economic future hanging on the race between DD and PO. But even if DD wins it may not offer a chance for an economic turn around as in did in the late 80’s.

CarlosFerreira

TheDude

Don't forget to consider how declining supply will impact the economy. Gail Tverberg wrote three excellent pieces on this:

Economic Impact of Peak Oil Part 1: A Flashback
Economic Impact of Peak Oil Part 2: Our Current Situation
Economic Impact of Peak Oil Part 3: What's Ahead?

We've had threads such as The Near Term Economic Effects of Peak Oil, too.
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alecifel

I don't think demand destruction is going to keep "oil at bay". Demand destruction is the MANIFESTATION of peak oil. That's why I think Campbell's Oil Depletion Protocol is a nice concept but redundant. Every time the price ratchets up, people make individual and household economic decisions that reduce consumption. Declining production will then follow suit. If demand destruction drops below production capacity, then there will be a glut and prices will fall back to damn-near free again. Then demand will go back up. But it will take less time than before to get to the hurtful price, because capacity is diminished. And destruction ensues again. So it won't keep the price held down; it will plummet back down to some ridiculously low price, then as demand comes back it will soar back and we'll talk about restricting speculation and windfall profits again. Wash, rinse, repeat.

One could liken the human built environment, including its economy, as a giant plant. It behaves as one. Energy goes in, and growth is made. The struggle is always for growth because that's all life can do. Now that growth is going to be hitting a ceiling that is getting ever lower. Peaks knock growth down, it gets back below the sustainable line, it starts again. It doesn't get as high as before. "Sustainability" on a national, or global, level will never be achieved. Individuals can (and should) pursue it. But growth is the program for all organic things, and the economy / society / industry is a man-made organic system. So grow, dieback, and grow again until dying back again is all it can do.

Peak Oil has arrived for all practical consideration. Geology is actually moot. The world may actually have 112 million barrels a day of capacity if it's all developed, but the time to bring that capacity on line was 15 years ago. Now we're playing catch-up all the way, no matter what the USGS, Daniel Yergin or anyone else says is "theoretically" possible.

Deffeyes' argument with economists is moot as well. The total ideal sustainable production plateau may be only 85 mbpd, or it may be 200 mbpd. We'll never know. It may have truly been possible to shove the cashier's window full of money and have God put more oil in the ground. Unfortunately, the cashier's window is closed and the time for that investment has passed.

Due to our own mismanagement of the resource, and the profit motive trumping production planning, we have hit an Economic Oil Peak that will prevent us from ever seeing the Geological Oil Peak.

That's my take, have it with some salt.
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Nick J. Allen
Hilton, Oklahoma

"The Chinese have many hells. This one is the hell of valueless currency." -- J. Albertson

ROCKMAN

Al,

All good points but I’m not too sure about the certainty of free falling oil prices. That happened in 1986 when Saudi opened the valves so they could regain market share. It will be interesting to see if OPEC actually functions as a real cartel this time. I don’t own any oil wells at the moment but if I did and oil prices stated heading south I would cut my production back to the minimum cash flow I needed. My wells are going to produce only so much oil. If I can afford to keep it in the ground why not wait for higher prices to return. I doubt it would be too many years down the road.

alecifel

Owning a producing well is one thing. That's what American producers do when there's a fall in prices. But a state-owned oil company, particularly in a country where oil is the only revenue there is, has a pretty high cash flow need. If the price of oil were to fall back to say, $40 a barrel, countries like Nigeria, Venezuela, Iran, ad nauseum, will find themselves unable to bolster the budgets they've taken on in the last couple of years. So cutting back on production means wrecking their economies, not a good idea at a time when food prices are soaring and populations are hungry.

There are two forces at work simultaneously during an oil shock that contribute to future oil shocks. 1st, users are looking for ways to economize and investment is flowing into alternative energy. 2nd, producers are drilling, drilling, drilling and bringing additional production on line. But the slow lead times on those projects means that often they don't actually come on line until well after the demand destruction has brought the price of oil back down. Once you've sunk a couple hundred million in a hole you have a pretty strong need to complete it. Hence, the glut. Once the glut strikes investment in alternative energy stops, people drive luxury cars again and the cycle starts over again.

The "sustainability" point is midway on that curve, but you can't see around the curve, and momentum keeps swinging you past the point on each pass. And so it goes, the gradual see-saw unraveling action of all we've built since 1900. Boom and bust, maginified to exponential proportions by scarcity. So instead of the usual 7 to 10-year cycle of prosperity/recession, we'll have depression/relief cycles. But it gets a little worse each time. How many times will we roll around the curve and back again before people en masse decide that investing is too risky? That's when it all comes unglued.

Three cycles? Two?

I welcome everyone's ideas.
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Nick J. Allen
Hilton, Oklahoma

"The Chinese have many hells. This one is the hell of valueless currency." -- J. Albertson

Opies

I don't think this is demand destruction keeping oil at bay. I think this is what price oil SHOULD be and the 140's we saw were equivalent to gold in the 1000+'s. Like gold, it dropped down to a more reasonable price and stabilized. It will eventually start climbing back up slowly just as gold has, but might drop a bit more before that. What little demand destruction there is will be eaten up by growth. We are riding a very unstable plateau right now. Just hope it holds out for a while longer Wink

TheDude

My feeling is that the big automakers can only survive 2-3 of these cycles. They need to build an EV fleet ASAP, which in full force would utterly kill demand for oil, but will delay the day of reckoning as long as possible; perhaps it will be a game of last man standing, and even the winner might not have the capital to retool the manufacturing of the losers, after the impact of global decline in GDP; nor will citizens have the means to purchase these expensive new cars in the first place.
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Cogito, ergo non satis bibivi
I will not abide another toe.

droper · Tar Sands Joined: May 31, 2006 Posts: 21

ki11ercane

DantesPeak