[Graeme]

Are you going to believe your lying eyes?

Oil's average price posts new records

It is a slick piece of public relations to convince people to disregard what is right in front of them and believe the opposite. And yet, that is what the oil industry has achieved with an oh-so obviously coordinated campaign to tell the public and policymakers that there is no need to be concerned about future oil supplies.

Many people remember the price spike of 2008 which shot prices to an all-time high of $147 a barrel. Oil subsequently crashed all the way down to about $35 at the end of that year as a brutal contraction gripped the global economy. But, oil has subsequently been making new all-time highs when you consider the yearly averages.

U.S. drivers should not be that surprised by this for they paid average daily gasoline prices that were higher in 2011 and 2012—$3.53 and $3.64 per gallon respectively—than they did in the previous record year of 2008 when they paid an average of $3.26, according to the U.S. Energy Information Administration (EIA).

Brent Crude, which has become the de facto world benchmark price for crude oil, has also just posted back-to-back years of record prices, higher than even the average daily price in the fateful year of 2008. In that year Brent achieved an average daily price of only $96.94 according to the EIA. But, in 2011 the average daily price was a record $111.26—which was followed by another record in 2012 of $111.63. The price in 2013 has so far averaged about $114.

resourceinsights

[dorlomin]

Peak oil is not the excitement of bands of thugs led by the great Humungus after your guzzaline, it is the slow, crushing mundanity of an incoming tide that constrains your horizons that little bit more every year.

Cant go driving quite as often. Holidays have to be a bit more local, more people unemployed.....

Its the slow, cold, creeping reality of prices always going up and things never quite getting better.

Nice article, reminds us that the big spikes and dives are far less important than the slow upward grind in terms of price.

High price will open new resources, but probably not enough.

[dissident]

Peak oil is not the excitement of bands of thugs led by the great Humungus after your guzzaline, it is the slow, crushing mundanity of an incoming tide that constrains your horizons that little bit more every year.

Cant go driving quite as often. Holidays have to be a bit more local, more people unemployed.....

Its the slow, cold, creeping reality of prices always going up and things never quite getting better.

Nice article, reminds us that the big spikes and dives are far less important than the slow upward grind in terms of price.

High price will open new resources, but probably not enough.

I am not so sure it will be a nice gradual constriction. The economic system has lots of tipping points. At least in the short run there will be plenty of players who are not willing to work on marginal profits and downsize themselves into a new mode. They will yank their money into some other investment which they think has more chances of keeping the dough rolling in. This BAU mentality can trip the world economy up rather badly. Few in the 1st world are prepared to go back to the standard of living of the 1920s and earlier. There will be a lot of disruption as people learn.

Mad Max was a silly plot anyway, aside from the gang part. All that gasoline and driving around as if food did not matter. In the future the fight will be about food and not gasoline.

[Revi]

I thought it was getting more expensive. It seems like we've become inured to the fact that everything is getting more expensive now. I can't even mention peak oil any more because nobody wants to hear it. It sure looks like we have passed the peak though. It's never good to point out the obvious.

[Rod_Cloutier]

I work for a JIT food wholesaler. The business model is super efficient; so long as things run on time.

Delays from, strikes, inclement weather, production delays, train derailments, ect, ect. are all bad for business.

All that would be needed to crash JIT systems is transportation and production systems running slower than expected. (I'm hoping none of this happens for many years)

[ian807]

Increasing oil prices threaten the world's interdependent just-in-time supply chains which depend on cheap transportation fuels. Because of the interdependency, non-linear breaks occur when certain critical commodities become too expensive to acquire.

That's a mouthful. What's it mean?

Imports from China start becoming prohibitively expensive because of high fuel prices. Exports from the USA and other countries are affected too. International trade starts diminishing - never to zero, but to a comparitive trickle.

Then what?

It means that your local electricity supplier can't get affordable copper wire from Chile, or even Mexico. They can't afford the gasoline to run the trucks. They can't get a hundred little things from flashlights and tools to computers and pens from China. They switch to aluminum, and can still get that at an affordable price, for a while. Computers are replaced with whiteboards and paper. Working electronics are hoarded and become expensive.

Eventually, the power company has to start to recycle wire in inventory, scavenge parts and gasoline. They buy from local sources, if they'll sell, because they can't get any more wire, or gas, or computers or tools either. Soon, prices go up on so many items that people are laid off and unprofitable areas are just abandoned by the utility company and lose electricity - permanently. Rural areas of the USA and other countries start going dark.

Of course, when this happens, it happens to all the other industries at the same time. The coal power plant can't get coal, because the train can't get diesel. The gas power plant can't get gas because shipping the used pipe is prohibitive (Forget about new pipe).

Without power, all other industries start to break completely or go primitive, doing the best they can. Brick manufacturers might survive, as might lumber companies. Local, low power farming will survive. Local 12-volt power systems built from car alternators and batteries will become ubiquitous.

[Pops]

Gotta disagree Ian, I think the grid would be the last modern thing to go.

For the simple reason that most folks would cut every other bill to the bare minimum in order to keep on a couple of lights. I know would.

Just like the US hasn't quite come to a stop because we've had to cut back on Sunday drives because of record high oil prices (hehe can't say I'm off topic now), the kids would finally learn to turn off the lights!

Now, let me assure you before I get accused of being a denier, I have al least an inkling of how complex The Grid is but, I also know that it doesn't need to be perfectly maintained to function on a basic level.



I'm in the Ozarks, which didn't get power until after WWII. I'm rewiring my house, which is almost 100 years old and half of that time it had no power and until I bought it it had one light fixture and one outlet in each room. Life on one tenth of what we normally consume would be an untold luxury compared to everything that came before.

The grid is the signature aspect of modernity. More so even than a judicial system or representative government perhaps. The government will do anything to keep it up and in fact so will the public.

[ian807]

Gotta disagree Ian, I think the grid would be the last modern thing to go.

For the simple reason that most folks would cut every other bill to the bare minimum in order to keep on a couple of lights. I know would.

Just like the US hasn't quite come to a stop because we've had to cut back on Sunday drives because of record high oil prices (hehe can't say I'm off topic now), the kids would finally learn to turn off the lights!

The grid is the signature aspect of modernity. More so even than a judicial system or representative government perhaps. The government will do anything to keep it up and in fact so will the public.

Pops, I think you're correct as regards individuals and perhaps even the government's intent. I just don't think it'll matter when it comes to large industries.

I chose the electricity industry as an example to illustrate the effects of supply chain disruption feedback and its effect on the economy. I could have chosen oil, or food or any basic commodity.

Yes, people use less power, but the aluminum plant doesn't have that luxury, nor the copper smelting plant, nor the manufacturer of pipe for oil wells or gas pipelines, nor the railroad. When the supply chain breakdown hits the energy industry itself (particularly the petroleum, coal and gas industries), I think we go from a gradual powerdown to an unpleasant full stop and I think we might find that the government can't do a damn thing about it but pontificate.

Actually, at that point, referring to anyone in Washington, DC "government" might be a kindness, as without a generous supply of electrical and hydrocarbon-based power, there's little any they can do outside of their local sphere of influence. The Federal government would become largely irrelevant.

[kublikhan]

Working electronics are hoarded and become expensive.

I am expecting the opposite to happen. Discretionary goods like electronics will fall in price as demand falls. Electronics are dropping in price.

The NY Fed blog has an excellent post breaking down the decline in consumer spending during this most recent recession. They highlight two rather mind blowing charts that show just how severe the decline in discretionary spending has been. The drop in discretionary services expenditures in the last recession was much more severe than in previous recessions: the nearly 7 percent fall from the peak is more than double the percentage decline in the early 1980s recession (the previous “champion” in this dimension).

They went on to show how much weaker the “recovery” in discretionary spending has been when compared to past recoveries.

The Collapse In US Discretionary Spending

DESPITE Australians' undying love for gadgets, it isn't getting any easier to make a dollar selling electronics -- and the problem can be summed up in a single word: deflation.

So when the ever plunging price of keeping ourselves entertained led David Jones this week to announce that it was abandoning DVD, music and electronic games altogether. we're dragged down by the home categories, particularly electronics, which would include TVs.

Electronics retailers including Game, Wow Audio Visual and Retravision Victoria were among a slew of retailers to go bust. Last year, Woolworths sold out of its Dick Smith electronics chain after years of underperformance.

Chief executive Richard Goyder said the company was cutting the space allocated to electronics in new stores for the Target and Kmart chains; and, while new and innovative items would continue to be stocked, CDs and DVDs were gradually being phased out while televisions had been greatly downsized at Target and pulled out of Kmart altogether.

Of course, DJs could draw higher margins by simply selling at higher prices, but in a frugal consumer market where technology allows shoppers to instantly compare the price of goods at competing outlets, there are fewer and fewer suckers every day.

Falling prices and savvy buyers take the spark out of electronics

[Pops]

Although I've posted several, I think the Tipping Point theories get too much credit.

As a doom scenario "tipping points" have great appeal. The problem with them is they discount demand entirely, they assume everyone will sit on their thumbs and not attempt to create a workaround to whatever the shortfall. Not only that but they assume all demand is equal but it isn't. Some demand is driving to the gym to exercise (!) but some is an ambulance ride to save your life.

The oil market hit a major tipping point in '08 at $150, a 600% increase in 6 years. Demand did crash a couple of percent but, longer term, consumption has only leveled off and mostly because the biggest wasters (US,EU,Japan) have cut back some fraction of a percent each year. For the last 2 years it's hovered at the highest average prices ever - a level most peakers (probably me included) said would kill demand permanently. And yet the growing economies are using ever more and the stagnant economies are staggering along.


An aluminum plant can use less energy, simply by making less aluminum. Obviously there would be consolidation, layoffs and higher costs for aluminum. But if the power companies needed aluminum to meet demand they would pay the cost then raise their prices to the electric consumer and where are you? Higher prices, and like I said previously, forced conservation but not the end of demand for power.

Peakers are supply-siders but the world is demand-driven. I think that was the flaw in peakers' thinking way back, mine too probably. The popular idea was that once supply constraints caused prices to rise to some magic point, the whole carnival would instantly cease, all demand would instantly dry up, never to return. Obviously the big flaw was thinking demand and so price were entirely inelastic: we use this much so we need this much and without this much it's Full Stop.

Demand can't create supply from nothing but "for want of a nail the shoe was lost" assumes a horse can't be ridden without a shoe or that, heaven forbid, the rider would have to walk.