How expensive do you think oil will get?
(posted by jackson)
We just concluded our first officially scheduled AOTP chat. (Transcript of chat is here.) For me, one of the most interesting moments was about Peak Oil. Talking with Jennifer, I realized that some people have imagined “worst case scenarios” that are very different than what I’ve imagined. Which is interesting, because we’ve had several posts about Peak Oil here on AOTP, and I’ve always assumed that I was in agreement with the writer - but perhaps they were thinking things would get worse than I imagined, faster than I imagined, or vice versa. So, rather than assume that when we imagine disaster scenarios, we are all imagining the same disaser scenario, let’s get down to specifics. How expensive do you think oil will get? What will be the average price for the next 10 years?
I have suffered something of a failure of imagination. Now that I think about, a truly catastrophic increase in the price of oil is the only reasonable scenario to consider when one is trying to imagine a worst case scenario. I personally don’t regard that as the likely scenario, but it is a reasonable scenario, and certainly one that policy makers should consider. During the chat, when I offered what I felt was a fairly bad scenario, Jennifer saw it as a “best case scenario”:
(07/16 08:14 PM) Jennifer: My main concern regarding peak oil involves personal transportation. The majority of Americans live in situations where daily life is impossible without a form of cheap, fast individual transport enabling folks to travel dozens or even hundreds of miles in a day. And where personal transport is concerned, there’s no viable replacement on the horizon for the internal combustion engine. Mass transit only works if a large number of people live and work in the same general area.
(07/16 08:15 PM) jackson: Jennifer, suppose for a moment gas goes up to something like $6 a gallon and stays there for 10 years. What changes do you think people will make?
…
(07/16 08:18 PM) Jennifer: If gas goes up to $6 a gallon there’d be a shift to more fuel-efficient cars (as we’re seeing already), and far-distant suburbs would become less desirable places to live (ditto), but frankly I think “gas reaching $6 and staying there” is a scenario so best-case as to be implausible. I suspect gas will continue getting more and more expensive. And government will continue making things worse; despite everything, there’s still plenty of snob-zoning laws forbidding high-density housing and so forth.
My own guess is that oil will get more expensive for a year or two or three, then turn around and get cheaper for four or five or six years, and the average price for the next 10 years won’t be too much higher than it is now. But I realize, a lot of very smart people are imagining worse scenarios than this.
So what is your guess about the average price of oil for the next 10 years?
Tags: peak oil
July 16th, 2008 at 9:12 pm
I can’t make any firm predictions because there are far, far too many variables to consider: how badly will government muck things up, what goes on in the Middle East, what will China and Russia do, etc. There’s also the problem that nobody, except perhaps a few Saudi princes, knows exactly how much oil remains and how much can be extracted over the next few years.
As I mentioned in the live chat, my main concern for America is transport; I’d almost call the problem Peak Personal Transportation. The overwhelming majority of Americans *need* a car to go about their daily lives. And cars need gasoline. Already, with gas still below $4.50 a gallon, I’m seeing more and more stories about people in rural towns or distant suburbs who find that simply getting to work is costing a bigger and bigger chunk of their paychecks. And most of those people only lived in the sticks because it was cheaper than living close to where they worked. Now they’ll have to either move closer to work or quit, and they can’t really afford either option.
Another thing I mentioned in the chat is that it’s not merely a case of “can I afford gas to drive where necessary” but “are there decent roads for me to drive on.” Roads are funded with public money, and right now the public is mostly okay with that because everyone, even the poor, make ample use of the roads. That won’t be the case when only the upper classes can afford to drive.
Eventually society will rearrange itself into something workable; in the long run I expect to see far more railroads, or perhaps a return to the inter-urban trolleys and streetcars of decades ago, but in the short term, say the next 15-30 years, I expect things will get pretty nasty.
And this all assumes government only does moderately stupid things, like attempt price controls and other bad ideas. If government does ULTRA-stupid things, like start more major wars, there’s no telling HOW bad things will get.
July 16th, 2008 at 9:42 pm
Yet another consideration: in the chat someone posed the question of how high gas prices must go for other forms of transportation to be economically competitive. That question’s hard to answer because now, the whole “own a car and drive where you need to” model is heavily subsidized by the government. Even ignoring blue-sky costs like “military adventures attempting to control oil supplies,” the roads alone are an enormous subsidy. Our road system is an expensive, complex, high-maintenance deal. If drivers had had to bear the full cost of their share of the system all along, I highly doubt America would ever have become as sprawling and car-dependent as it is now.
July 16th, 2008 at 11:43 pm
Jennifer, it is true, there are so many variables that it is nearly impossible to make a sound prediction, I guess I was expecting a repeat of the 70s/80s where prices first went very high, and then came back down. You might be right, though, that the needed adjustment time is more like 15-30 years, rather than the 5 or 10 I was thinking.
In some ways, I think predicting the future is a bit like a rorschach test. The exercise teaches us a lot about ourselves.
July 17th, 2008 at 12:30 am
I won’t hazard a guess at the highest oil price in the next 3 years. But my understanding is that oil companies have been very risk averse in their investments, using a price of $30/barrel in their planning. If they become convinced that high prices are here to stay, they might not invest in fields that are only profitable at $130/barrel, but they’ll certainly start investing in fields that are profitable at $70/barrel. That influx of oil, coupled with adjustments and efficience improvements in the next few years (e.g. I live in LA and I keep seeing more and more Priuses on the road) will stabilize prices. I would be surprised if the price of oil in 2011 exceeds $120 in 2008 money.
July 17th, 2008 at 6:17 am
My own guess is that oil will get more expensive for a year or two or three, then turn around and get cheaper for four or five or six years
What exactly would make oil get cheaper? Oil’s getting more expensive because there’s a limited supply being met with increased demand. Is supply going to increase dramatically somehow? Are people going to suddenly stop consuming oil?
July 17th, 2008 at 6:57 am
I’ve mentioned it before, but Thoreau’s analysis is overly simplistic. Determining the viability point of new sources of oil is not done on some absolute dollar scale. As the value of a dollar plummets, the numbers used to calculate those break-even points skyrocket in response. What was seen as a potential break even point at $30/barrel 10 years ago is no longer at $30/barrel because of inflation. And because we are about to enter into a period of even higher inflation, these numbers are going to get even higher and more variable - meaning that even higher margins of error will be assigned *before* investment will go forward.
A *much* better way of gauging this issue is looking at energy returned on energy invested, and many of the deep sea and shale oil projects are, at current technology, below a 1.0 ratio in this respect. IOW, it takes more than the equivalent of one barrel of oil to extract one barrel of oil from these sources. No matter what dollar values you place on this equation, the end result is always the same.
Jennifer has identified probably the major problem with increased oil prices. But don’t forget that almost everything you consume, from food, to toiletries, to basic consumer goods, is built somewhere far, far away and shipped to a store near you. Right now, you’re not seeing too much of the increase in gas costs transmitted to these products, because the long-haul independent truckers are taking it in the rear and eating the increased costs through fixed contracts. That situation will not last too long - either most will go out of business, increasing the bargaining power of those that remain, or there will some sort of reform of the contracts voluntarily. Either way, the cost of almost everything you buy will increase dramatically sometime in the near future. The effects will be most noticeable the further you are away from water - shipping via sea is an order of magnitude cheaper than shipping by rail, which is several times cheaper than shipping via road. There’s going to be a lot of pain in the far-flung suburbs that have no rail service, in other words.
Finally, all of this will come back and cycle into the price of oil. After all, the people who drill the oil, maintain the equipment, ship the oil, maintain the pipelines, etc. will be needing more money just to survive (especially when you consider that many of the new oil sources are in remote areas that require the necessities to be shipped to them long distance).
And all of this is ignoring the elephant in the room: the overhanging excess money supply that was pumped out over the last 15 years. People who have saved that illusionary wealth are going to start speculating like wild in a vain attempt to protect their wealth from the stagflationary recession. Oil will be one area that they speculate in, at least for a while, and that will cause a lot of turbulence in the market. After oil speculation dies down some, the next target will be food. Early adopters are already starting to speculate there - check out the increases in the price of some staples like popcorn and flour.
July 17th, 2008 at 7:08 am
And I forgot to mention, demand will decrease, especially in the U.S., but it’s an open question whether it will decrease enough to offset the decreases in production seen in almost every major oil exporting country (especially of the light sweet stuff).
Another problem is that alot of those dollars that we’ve printed in the last decade or two are held by Russia and China (among others). These two countries will have plenty of incentive to subsidize the cost of oil in their own developing economies, and they’ll have the dollars to do it, at least for a few years. So demand in those two countries, especially, could take off significantly in the short term, offsetting any demand relief generated in the U.S.
July 17th, 2008 at 8:53 am
quasibill-
Fine, restate my analysis in terms of inflation-adjusted dollars, and it still holds.
July 17th, 2008 at 9:51 am
Thoreau,
“Fine, restate my analysis in terms of inflation-adjusted dollars, and it still holds.”
re-read my post, and you’ll see that it doesn’t. If the increase in the price of oil we are seeing results mainly from the from the loss in value of the dollar, as I contend, then your analysis does not hold very much weight at all. You see, if I’m right, as the price of oil increases, the price of the alternative sources increases in lock-step. The relative cost of each source remains the same, even though the absolute numbers of dollars for each increases. The alternative sources do not become more viable as the price of oil increases - in fact, they may become less viable, due to multiplier effects of inflation that were not included in the original model, and due to the effect of pricing in buffers for volatility.
You need to forget about measuring this in dollars (or other fiat money) and start measuring it in EROEI. Of course, that doesn’t get you much further, because there is substantial debate regarding what should be included in that ratio, but at least you’ll be describing reality instead of fantasy-land.
And I’m not even getting into the issue of “mobile” vs. “stationary” energy sources, and how the difference is important in figuring out how this will all play out.
July 17th, 2008 at 11:20 am
I don’t think the 70s/early 80s are a good indication of how the next oil shocks will play out; the 70s oil shortage was a purely political one, as there was still plenty of oil but some of the suppliers decided not to sell it to us. That isn’t the case now. And one reason the prices finally dropped after that was due to the discovery of the huge oil field in the North Sea. It is highly unlikely there are additional North Sea-sized fields yet to be discovered.
July 17th, 2008 at 12:35 pm
I’m fairly optimistic about how much wiggle room there is on the demand side, for reducing dependence on fossil fuels. That’s not to say that gasoline won’t hit $6 or over in today’s dollars, and probably keep climbing over the next twenty years, but only that it won’t be completely catastrophic.
There are some areas with comparatively little give, as with people who live in commuter suburbs. Even there, though, there is probably considerable room to economize, just because most people did so little of it in the era of cheap oil. Things like planning ahead to combine errands, carpooling, etc., are likely to have at least a marginal effect on gasoline consumption. And at the very least, those who do live on bus routes are more likely to start using them, and new routes are likely to be feasible.
I expect the food supply chain to readjust extremely fast. It’s a safe bet some 20% of airline and trucking routes will close over the next year or so, and probably another 20% or more in the next few years after that, with the cost of shipping stuff in skyrocketing. As a result, the amount of food produced in backyard gardens will increase several hundred percent, and people will be snatching stuff off the tables at farmers’ markets as fast as it appears. To say that community-supported agriculture is a growth industry is an understatement. We’re headed for a time when the “100 mile diet” will be the default, with most people buying some exotic or out of season items as special treats, but otherwise subsisting on locally-grown stuff.
We’re probably nearing a takeoff point when word starts spreading about passive heating and cooling design, after which most new housing construction will incorporate these features.
I also expect fairly rapid progress in adapting power plants for waste heat recycling, and maximizing use of existing railroad capacity.
These things are probably at least sufficient stopgaps to prevent total catastrophe, as population patterns shift, industrial supply lines and production scale adjust, and railroad capacity is expanded, over the next twenty years or so.
July 17th, 2008 at 2:15 pm
I’m far more pessimistic than you, Kevin. Remember Dick “the American way of life is non-negotiable” Cheney? I don’t think his is a minority attitude. A nation of people saying “Looks like we’re going to have to make do with less” will seek out solutions, but a nation of people saying “Dammit! We’re being robbed of something that is rightfully ours!” will instead seek out folks to blame. And I think the latter will be far more common.
Remember when Hurricane Katrina wiped out our oil-refining capacity in the Gulf of Mexico? In Connecticut, gas prices jumped nearly a dollar a gallon overnight. But that’s to be expected; you don’t have to be an economic genius to figure out “Okay, there’s been a large and noticeable shortfall in supply, so prices will go up to compensate.”
But our governor — a moderate Republican who presumably should know better — started making pandering speeches about those evil price-gouging gas station owners taking advantage of us. If prices hadn’t dropped of their own accord a month or so later, I seriously think she would’ve done something very stupid: implemented price controls, for example. And made a bad situation far worse.
And bear in mind that for the overwhelming majority of Nutmeggers, that extra buck a gallon was merely an inconvenience. You didn’t see huge masses of people forced to choose between buying gasoline and buying food. If mere *inconvenience* spawned such irresponsible governmental pandering, just imagine the pandering actual *hardships* will inspire.
July 17th, 2008 at 9:48 pm
strasmangelo jones, oil got more expensive from 1973 (or, really, the late 1960s) to 1982, then it got cheaper for about 15 years.
A high price both changes people behavior (which leads to less demand) and mobilizes additional resources (which leads to more supply).
July 17th, 2008 at 10:28 pm
Jennifer, I’m sure you’re right about the pandering and the sense of entitlement. But at most, any pandering the government does is likely to be a diversion and completely ineffective; and meanwhile, it won’t in most cases directly *thwart* productive individual action to reduce dependence on fuel and turn to local sources of consumer goods. And no matter how good it feels to scream “I want my cheap gas, now, now, NOW!”, most people will be simultaneously looking around to buy stuff where it can actually be found, and making lower-price substitutions where they can be found.
July 17th, 2008 at 10:34 pm
strasmangelo jones, oil got more expensive from 1973 (or, really, the late 1960s) to 1982, then it got cheaper for about 15 years.
Right, primarily as a result of an OPEC embargo. The price of oil is going up today, however, because we’re running out of oil. This is a bit of a more permanent problem.
A high price both changes people behavior (which leads to less demand) and mobilizes additional resources (which leads to more supply).
You’re not going to significantly lower the price of oil just by getting a few more people to ride the bus. We use petroleum in just about everything right now, from the manufacture of plastics and fertilizer to the transport of just about everything we buy. That isn’t to say that there’s no advantage in getting people to consume less oil, because there obviously is - if nothing else, it means slightly less carbon being spewed into the atmosphere - but to really get people off oil, you’re going to need much more sweeping behavioral changes than the kind we’re seeing now.
As for “mobilizing additional resources,” where, pray tell, are these additional resources going to come from? The usual crackpot answer is to wave vaguely at ANWR (which has barely any oil in it worth pumping, and which can only pumped at great expense), offshore drilling - excuse me! “exploration!” - which isn’t guaranteed to produce squat, and, god help us, oil shale, one of the least efficient possible sources of energy on the planet. At some point we’re going to have to grow up and face the fact that the days of cheap energy are over, and focus our efforts on transitioning to a world without oil. I’d also like it to be a world without fossil fuels, given that I’ve got nieces and nephews and I’d rather they not have to live in a world with runaway global warming.
July 17th, 2008 at 11:47 pm
strasmangelo jones wrote:
“The price of oil is going up today, however, because we’re running out of oil. This is a bit of a more permanent problem.”
You have no way of knowing that. No one can know that. We have to wait 50 years to find out. It’s only in retrospect that we’ll be able to tell when Peak Oil actually happened. Until some decades have passed, it’s all guesses.
July 17th, 2008 at 11:52 pm
“At some point we’re going to have to grow up and face the fact that the days of cheap energy are over,”
The days of cheap oil might be over, but cheap energy? There is still a lot of coal around. We might have another 10 or 50 or 100 years of cheap coal. It’s hard to know from the perspective of 2008. I do think in 50 years we’ll have a clearer idea about how much fossil fuel was, in fact, in the ground 200 years ago, and how much reachable, inexpensive fossil fuel is left at that point.
July 17th, 2008 at 11:54 pm
“I’d also like it to be a world without fossil fuels, given that I’ve got nieces and nephews and I’d rather they not have to live in a world with runaway global warming.”
For sure, there are good reasons to avoid fossil fuels, other than expense.
July 18th, 2008 at 12:22 am
There are problems with coal, as well. For example, if the externalities involved in mountaintop removal in West Virginia (essentially destroying entire valleys that people used to live in) were fully internalized in cost, I don’t think it would be very economical. I doubt the mining companies could even have got their hands on such enormous tracts of land without a little help from the government, either through government preemption of vacant land and gifting its privileged clients, or through outright use of eminent domain.
July 18th, 2008 at 12:26 am
“You have no way of knowing that [oil supplies are running low]. No one can know that. We have to wait 50 years to find out. It’s only in retrospect that we’ll be able to tell when Peak Oil actually happened. Until some decades have passed, it’s all guesses.”
You’re right that peak oil can only be seen in the rearview mirror, so to speak, but it won’t take 50 years to recognize. All you have to do is wait until worldwide oil production levels start dropping. As has happened two years in a row, now, despite higher-than-ever demand and prices.
That said, even before production peaked there were signs that it was imminent, such as the methods used for oil extraction. Take the Saudi fields at Ghawar: they’re apparently reduced to using water-extraction methods in their fields. (Oil floats on water, so you force water into the field and the oil floats on top.) That’s the method used in a field on its last legs. And what the Saudis are pumping out these days (according to some) is basically water with a little petroleum tainting it.
July 18th, 2008 at 2:56 am
Jennifer wrote:
“You’re right that peak oil can only be seen in the rearview mirror, so to speak, but it won’t take 50 years to recognize.”
Well, it won’t take 50 years to recognize if 2008 is the year of peak oil production, and if it’s all down hill from here. But if oil supplies continue to grow for the next 47 years, then, yes, it would take 50 years before we could see the decline.
Of course, it seems very unlikely that oil supplies will continue to expand for another 47 years.
If I had to guess, and it is no more than a random guess, I’d say peak oil will happen some time in the next 20 years. But whether the peak year is 2008 or 2028, I really don’t see how anyone can possibly know.
July 18th, 2008 at 7:14 am
“We have to wait 50 years to find out. It’s only in retrospect that we’ll be able to tell when Peak Oil actually happened. ”
Again, it’s very important to qualify “Peak Oil” somehow; that term is too generic and can be easily abused.
For example, it doesn’t take a rocket scientist to see that production of light, sweet crude is peaking as we speak. Barring some truly monumental and totally unforeseen find, or barring vast improvements in the efficiency of stationary renewable energy sources to help offset the costs involved in pumping from deep sea sources, the absolute peak (which will only be a few percentage points higher than what we have now, at most) will occur before 2012. Most sources are declining rapidly, and many of the predicted replacement fields are performing below expectations.
On the other hand, if you’re talking about heavy, sour crude, there appears to be a fair amount of slack that can be taken up in pumping that. But that has costs (either higher costs to market to clean it, or higher costs in pollution and equipment maintenance) that exceed those of light, sweet crude by a fair amount.
Peak *cheap* oil is a better term, IMHO. We’ll have plenty of energy options going forward - but none of them are going to be so cheap as the oil we’ve depended on for the last several generations.
And I’m with Jennifer - I think mass psychology is going to be a problem with this transition. If I were more internet savvy, I’d post to link to Pakistanis storming their stock market after it had lost 30% of its value, wiping out their savings.
I don’t think the torch and pitchfork crowd will be in Manhattan, but the 28% of americans who unconditionally support Bush (still!) will be singing “America uber alles” and looking for evil libruls and whoever else the echo chamber picks to blame. Times of economic crisis generally produce bad political and social results in the short term (French Revolution, Weimar Republic, etc.), and I can see a ton of really bad legislation being passed.
As for the ability to impede change, well, they haven’t built this police state for nothing, you know.
July 18th, 2008 at 7:19 am
The days of cheap oil might be over, but cheap energy? There is still a lot of coal around.
We can’t afford the environmental effects of burning coal any more than we can afford the environmental effects of burning oil - far less so, in fact, considering how much more CO2 is released in burning coal. The carbon sequestration technology needed to make coal “clean” doesn’t exist yet, and may never exist. Given how close we are to tipping points and runaway global warming, we need to radically decrease the amount of fossil fuels we’re burning, which in the short-to-medium term will mean reducing the amount of energy we consume, period. To increase the amount of coal we’re burning is a recipe for disaster.
July 18th, 2008 at 1:34 pm
[...] strasmangelo jones: The days of cheap oil might be over, but cheap energy? There is still a lot of coal around. We can’t afford the environmental effects of b… [...]
July 18th, 2008 at 10:05 pm
“We can’t afford the environmental effects of burning coal any more than we can afford the environmental effects of burning oil ”
Sure, that might be so, I was merely pointing out that there is still plenty of cheap coal out there.
July 18th, 2008 at 10:40 pm
Came over from Jennifer’s blog. Jennifer knows this already, but I’m a lot more optimistic about all this than most of you guys (admittedly, I can say that on most subjects about most people). My projections:
As quasibill says, there’s lots of sources of fossil fuels. They’ll all be more expensive that mid-nineties era oil; I’m not convinced they won’t be less expensive than the current price of oil, once they’re developed in three or five years. And coal is of course cheaper, though far more polluting. The problem with these options isn’t that they won’t provide relatively cheap energy; rather, as strasmangelo jones (and others) commented, that we’d rather not resort to burning them because of climate change concerns.
But there are a number of other technologies on the horizon. The economist (http://www.economist.com/printedition/index.cfm?d=20080621) had a really good survey of potential energy technologies in an issue a few weeks ago. Basically, wind power could plausibly supply 10-20% of the world’s energy needs within the next decade, solar’s a decade behind that, and nuclear and geothermal both have serious potential. At the same time, people are coming up with actual efficient methods of producing biodiesel (read: not AMD’s corn stock).
So there’s a not-bad chance that clean energy will actually become cheaper than coal currently is in the next ten to twenty years; in fact, Google and others are betting large sums of money on it. The transition might be a bit rocky, but with an end in sight we can probably manage.