[Pops]

Someone said that peakers figured that the world would go to hell in a handbasket if the oil price exceeded $100/bbl but it has and we haven't, or have we?

Lots of predictions were made of oil @ $500/bbl but it didn't get close before the bottom fell out of the economy.

Is there any way the price of oil could exceed $100 by a wide margin for any length of time?

Is there any way that oil price by itself could "collapse" the economy?

[vtsnowedin]

Someone said that peakers figured that the world would go to hell in a handbasket if the oil price exceeded $100/bbl but it has and we haven't, or have we?

It did not stay above $100 long enough to prove it but we certainly could see the weave of the basket!!

Lots of predictions were made of oil @ $500/bbl but it didn't get close before the bottom fell out of the economy.

$143 seemed to be quite sufficent for economic chaos to arrive.

Is there any way the price of oil could exceed $100 by a wide margin for any length of time?

Sure , Hyper inflation similar to Germany's between the world wars.

Is there any way that oil price by itself could "collapse" the economy?

Certainly! A high price would curtail all your discretionary use of oil and quite a bit of the economy is based on and feeds off from that use of oil. Imagine all the theme park and ski area workers out of a job if no one would drive to their venue.

[Pops]

I just noticed Gail has a post on almost this very thing Low Oil Prices Lead to Economic Peak Oil

We have all heard the story about oil supply supposedly rising and falling for geological reasons. But what if the story is a little different from this–oil production rises and falls for economic reasons? If this is the issue, it doesn’t really matter how much oil is in the ground. What matters is if economic conditions are “right” for continued and rising extraction. I have shown in previous posts that oil prices that are too high are a problem for oil importers while oil prices that are too low are a problem for oil exporters. As a result, oil prices need to be in a Goldilocks zone, or we have serious problems, of one sort or another.

Ah, the Goldilocks Zone, I like it! Oil can't rise above the economy's ability to support or fall below the ability of producers to extract - at least not for an extended period.

That's how my "wedge" plot form a couple of years ago worked...



turned into the increasingly volatile 2020 oil price challenge plot...

2020 Oil Price Challenge .jpg

[Revi]

I think last year had the highest average price for a whole year of gasoline. It doesn't really matter if it hits a high price and then crashes, what matters to the average person is a whole year of expensive driving. The whole thing is becoming impossible for most people now. Most people are too dumb to figure it out, so instead of getting a smaller car or a more efficient place to live they go bankrupt, and the next year they use a lot less oil. That's why the economy is tanking. There are too few people actually living in a way that consumes a lot of stuff now. Entire countries are getting shut off now, so there will be enough for other countries.

[Cloud9]

That will be the death of progressivism when the left figures out there is not enough. It really is us or them. Someone has to be pushed away from the table.

[SeaGypsy]

Besides those already fenced off.

Those currently at the table all bring something to it. Each claims a 'rightful' position. Who gets pushed away is a big question, as is how. Doubtfully anyone is going to simply opt out, pushing implies violence. When dinner parties get violent, it usually means the end of the party.

I think we are getting closer to that stage. Who gets the boot from the table?

Thinking metaphorically it it not as likely as some might think to be those bringing least to the table. More likely the mob will single someone out. The someone is the biggest a##hole at the table, the one most easily singled out, ganged up on. Being a big nasty thug with lots of mind games and a ton of resources might have secured a position at the table, but when things start getting grim, the host may be despatched, despoiled of those resources, by the same party.

IMO things are building towards a war against Islam. The spoils of said war are obvious. The costs could be beyond belief. Jihadis have been begging for this war. If and when it comes, it could be the fast descent to hell some peakers have been waiting for. The longer the rest of the world waits, the more dangerous things become, and it's not just about Iran or the enemies of Israel.

[ROCKMAN]

SeaGypsy – It seem like human nature to not expect the worse when it comes to military conflict. Why folks at the time called WWI the “war to end all wars”. Decades ago I read the comments of some general back in WWI regarding the development of air bombing. Said it was obvious there wouldn’t be future nation vs. nation wars now that it was possible to inflict damage directly on the civilian population. What govt would engage in such efforts?

Except for some doomers who we tend to mock most of us don’t see such conditions, no matter how bad they get, escalating to that level. Historians point to a variety of contributing reasons for the wars we’ve seen over the last 100 years but there always seems to be some element of resource competition. Depending on your interpretation of recent history the US has already invested $trillions and countless lives in such a “resource war”. Oil wasn’t the only issue but consider where the focus has been and it’s difficult to ignore the connection IMHO.

War? Naa…won’t happen...again. We’re much too civilized for that. But you know...this might be a good time to consider "exporting democracy" to Venezuela.

[SeaGypsy]

Invasions such as Iraq and Afghanistan, have shown the expense most likely outweighs the gain. However the Arab spring as a methodology could work much more economically in the long run, without running the risks associated with general Islamic agitation in the west. Oil sitting under well organised authoritarian military regimes is always going to be more expensive than oil sitting under a 3rd world basket case. The spring has already shown that there is more than enough sectarian extremism to destroy these countries from within. Looking at Nigeria as a massive experiment in hostile but non military extraction gives a good example. 10 years ago Nigerians believed they were going to become rich, now they burn each other alive over a stolen laptop computer.

When Cloudy brought up the subject of the inevitable removal from the table of some of the major consumers, I could not help but to think of the situation in the Middle East. 6-8 babies per woman. An emerging middle class with 3rd world migrant slave labour. A great sense of entitlement. A rapidly growing consumer index. A very questionable belief system. A dubious power structure. Seething sectarian undercurrents. Large reserves of the most important commodity.

Mad Max is already here in many parts of the ME & North Africa. Look forward to seeing security forces concentrated on protecting extraction infrastructure and sectarian war zones all around. Major military disbandment and destruction of significant equipment, floods of small arms and explosives.

The pushing from the table is already underway. Whether it results in a global Islamic Jihad remains to be seen. If not, there may still be a table to sit at a while, if so, well things are going to get awfully messy.

[Ibon]

Jack pine seeds only germinate when burned. Such will be the fate of human cultural evolution when confronted with the consequences of overshoot. I see this topic through that lens.

[Pops]

Nudging this back a little toward the topic, here is my thesis:

High oil prices, painful enough to encourage changes in behavior but not so high as to preclude those changes are the only mitigation for the effects of peak FFs. But quick increases to the very high prices levels peakers like Simmons warned of can't be maintained for any length of time so can't "Collapse" the economy down to some stone-age bug-eating level.

Simmons and others predicted overnight expensive oil due to rapid depletion. The only way I can see that happening is in a "cliff" scenario: high prices and stubborn demand resulting from the inertia of the old, cheap oil economy "pull forward" difficult to extract oil - like fraced, deep, arctic oil, causing the initial period of decline to be the steepest period, rather than the later, mid-downslope period - a higher peak but a steep cliff. But even then I don't think extremely high prices could be maintained long.

Think of it like this, the uses for oil are distributed along a continuum of utility, with many uses of oil today mere convenience at best and simple habit at worst. A high oil price can change those wasteful behaviors if the price stays high long enough. So at $100 oil, is the trip to the quick sac in the 4x4 to get a bottle of water worth $3 in unleaded?

Sure, we'd "like" to drive down for an Evian and we probably continue to do so at $3 if the high price appears to be temporary. But after some period, even the $3 cost for the Evian trip becomes less tolerable as it cuts into other, more important purchases, maybe baby's new shoes for an example. So for a while we drink tap water instead of driving for the Evian. After some time with no prospect of oil prices falling, we decide it would be better to trade in the 4x for an old Beetle or even better, move within walking distance of the Quik Sac. That is real mitigation.

But what happens at $500 oil and a $15 Evian trip? I'd think it's pretty clear that not only would the trip be eliminated PDQ but so too would the Quik Sac and the Evian. In fact the economy and so oil demand would never make it to $500/bbl. Look at how demand started to falter as far back as '05 when US Sunday Drives peaked, way before $147/bbl. Obviously the pinstripe gamblers were set up for a big fall of their own but oil prices were just as obviously putting enough of a squeeze on sub-prime mortgagees that demand began to be curtailed years before the credit casino bust.



http://ourfiniteworld.com/2012/04/16/th ... -exporter/

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The key here is that oil prices will remain just as high as the use of the oil justifies, they can't be higher.

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The other side of this is that all oil is priced at the value of the last barrel. That means if there is enough demand that someone will pay $100 to get a barrel, and a producer is able and willing to supply that barrel, everyone must pay $100.

Although it isn't often mentioned, the opposite is also true. When the requirement to producing flat out to fill demand is removed, the premium for opening every spigot is removed as well and so price falls precipitously, just like in 09.


So again, the perfect situation is exactly like we've had the last couple of years; prices high enough to prompt a change in consumption (see the charts above) but not so high that trading vehicles or locations is completely prohibited like in '08-09 - and - the longer this situation holds the better, long enough that we don't expect prices to fall at any moment back to Happy Days' level.


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That isn't to say oil prices can never be $500/bbl or more, they certainly will be eventually when enough non-utilitarian uses are pruned and the oil that remains has sufficient utility to justify the higher cost. Again, at some point the upward pressure on oil price due to depletion eliminates the unnecessary Evian trips so that the demand that remains IS worth the cost of the fuel - trucking baby shoes perhaps.

And so it goes, gradually the waste is eliminated and the truer value of the resource is realized as the 100 year glut of the upslope evaporates.

[Newfie]

Well, maybe.

But you sort of presume that the rest of the economy is in sufficiently good health to tolerate any additional stress.

If the pressure builds sufficiently slowly then the existing economy can adapt, to a point.

But this economy may be pretty weak in the legs already, it might not take much to disrupt it in a fairly drastic fashion.

Not predicting, just thinking out loud.

[Tanada]

Well, maybe.

But you sort of presume that the rest of the economy is in sufficiently good health to tolerate any additional stress.

If the pressure builds sufficiently slowly then the existing economy can adapt, to a point.

But this economy may be pretty weak in the legs already, it might not take much to disrupt it in a fairly drastic fashion.

Not predicting, just thinking out loud.

You know that puts me in mind of an analogy. The economy is like the air tank on a big shop compressor, as the pump forces more air into the tank it gets harder and harder to add more air and the pressure slowly builds. The more pressure in the tank already the slower the pressure rises because the pump has to work harder and harder. As people use the air tools connected to the tank they drain off some of the pressure which makes it easier for the air pump to recover. Energy prices effect the economy the same way, the higher the price the harder (more efficiently) the economy has to work to grow the whole economy any further. Like the tank holding the air if the pressure gets to be too much the cracks will appear in the economy, and if the pressure (price) stays too high for too long the cracks will spread until the join together and the tank (economy) catastrophically fails.

[Pops]

If the economy is disrupted, consumption will fall, that is the presumption. lol - I'm not really saying anything about the health or sickness of the economy.

It doesn't matter whether the economy is sick or well I don't think, it's all relative. Right now gasoline is about 4% of household expenditures, I think it was 5% in '80, so 4 or 5% seems to be a cap. If prices go higher, driving will go even lower or some other spending will be reduced to compensate.

You're right tho, Hamilton has pointed out that it is the rate of the increase that is most important, although I'd think that only goes so far if there isn't a return to a lower level between spikes.

[Cloud9]

I still believe there are tipping points in this on going contraction that will collapse the system. Exponential growth is the underlying premise of our economic system. The money in our pockets is borrowed into existence. That debt is predicated on the notion that an expanding economy will overwhelm that old debt with ever increasing tranches of new debt. It is a crazy scheme when you back up and look at it being put into place in a closed system.

The Federal Reserve System is now a hundred years old. In one sense it is has been an outstanding success, it has financed numerous wars against commies, criminals and poverty. It has funded education and research. It put us on the moon.

On the other hand, it has devalued the dollar at a rate of roughly one percent a year. We are now rolling through the last percentage points of that devaluation. Roughly half the population is now on some kind of public assistance. Medicare and social security are breaking the system. Everybody knows that the sovereign debt will not be repaid. Free money to the tune of $84 billion a month is the only thing keeping the doors open. It is clear that the design is to contain the debt and subsequent interest payments by debasing the currency.

That explains the smack down we have witnessed in gold and silver these last several days. What the central planners did not grasp was that the sheeple have figured it out. Instead of the rush away from precious metals they expected, they go an unprecedented buying of pms by the little people.

I think there was a reason all the money men were called into the President's office. Something broke. It probably broke in Europe first in Crete and now in Ireland. I think it's on it's way here.

[Revi]

I think you are right Cloud 9. There is something going on, and I'm onto sure what it is. Look at the stock market. It keeps going up despite the fact that almost all commodities are down. What does that mean? I think when that bubble bursts it will get ugly. We are headed for some kind of a collapse. It may not be the whole economy, but it will be another way of getting people out of the system. The price of a middle class lifestyle has gone up so much that it may not be feasible for a lot of people. Gas, heating and rent cost a lot more than most people make around here.

[SeaGypsy]

All the stock market growth means is that forced investment has to go somewhere.

[ROCKMAN]

SeaGypsy – Exactly. For a while now I’ve been taking a rather stealthy poll of my cohorts. Many of the old farts like me had been investing their savings in fairly low risk avenues. But that was back when you could get 5% or 6% in a CD of some sort. But everyone I’ve asked has moved some money into the stock market and most are more than a little worried about it. I am not one of them: I can tolerate a dirt low return…I can’t tolerate a loss. But they just couldn’t stand the safe and low interest rates. My engineer boss had moved most of his savings into the market years ago and got slaughtered. He’s just finally regained what he had lost. He would have more money now if he had gotten a 1% return for the last half dozen years. But he still can’t force himself to pull out of the market entirely since he’s hoping his recovery will continue. But he did make one safe move IMHO: paid off his $700,000 mortgage. But he still has stomach problems worrying about what he has riding on the stock market.

If for some unimaginable reason the feds let rates get back up I have little doubt the stock market would retreat significantly.

[Plantagenet]

I sold out of the stock market in March when the EU decided to steal everybody's bank deposits in Cyprus.

The switch by the EU from "bailing countries out" to stealing bank depositors money seemed a very bad sign to me----one of those things that you look back on after everything has gone to heck and wonder "what were they thinking."

[ROCKMAN]

Pops – What I wonder about is what will the dynamics be like when there are more folks able to pay $100/bbl when then there are $100 bbls to buy? I think most here accept the general premise that supply will always be in balance with demand thanks to price moderating the situation. IOW demand isn’t what you want but what you can pay for. Today the world is fully supplied with the oil the buyers can afford. If oil were selling for $50/bbl today I don’t think there would be enough supply to satisfy demand: so who would buy and how would that decision be made? But if we accept the proposition that, adjusted for inflation, the industrialized economies can’t pay much more than $100/bbl (in the long term) then oil won’t ever go above such prices levels with the exception of short term spikes. But someday the world won’t be able to produce the oil we’re currently selling. Maybe 5 years…maybe 20 years. My question isn’t about the date but how will affordable oil be allocated at a time when there are more capable buyers than sellers? One can still assume that price will limit demand…say $200/bbl. But can you imagine any economy functioning well at that price in the long term? Maybe but I have serious doubts.

So if my premise holds any water the question won’t be who can afford the oil but who can control its distribution. Which brings to mind the Chinese efforts to own as much oil in the ground as possible as well as tie up supplies long term via contracts and trade agreements. OTOH the US govt doesn’t own 1 bbl of foreign oil and AFAIK doesn’t have call on any overseas reserves. Consider how little, if any, Iraq oil is making it to the US. ExxonMobil and Shell Oil may own foreign reserves but they are under no obligation to sell to a US refinery…even one of their own. If they can make a better profit selling to a foreign refinery then it’s probably a good bet they’ll go that direction. And if the NOC controlling those foreign concessions via a Right of First Refusal (as many do) the operator may not even have that option. But as it’s been pointed out before, the US losing purchasing power isn’t beneficial to China…at least not today and in the near future IMHO. But 15…25 years from now? I don’t know. But it does give me some pause.