Sunday, November 9

What’s the long term price of oil?

In a matter of a few short few months as oil prices skyrocketed to peak at $150 a barrel, there was no shortage of expert analysis suggesting the world was on the cusp of the end of the oil age.

What was envisaged by many pundits was the world was to suffer from dwindling supplies and continue to be buffeted by price increases of the order of $200 to $250 barrel and beyond. At that time when I last revisited the ‘peak oil Theory” in my post in August this year I concluded there wasn’t enough empirical data available to reach any reliable conclusions, but if anything prices were likely to reduce to somewhere below the $100 per barrel in the shorter term although the overall peak oil theory remained creditable enough longer term.

But since then oil has tumbled to currently test $60 barrel, and may even fall as low as $50. Recessionary fears have had an effect but are insufficient in themselves to justify a 67% decline. Rather it has been the speculative investment in commodities, including oil,(seen as a hedge against inflation and a weak dollar) that caused both its rapid increase and subsequent collapse as commodities sunk. Hence the collapse of commodities precipitated an unwinding of these positions which accounted for most of the initial recent rapid price decrease just as its reverse impacted similarly on oils previous upward price spiral.

Oil is also not subject to the usual price mechanism, e.g. as prices rise supply will increase to meet the demand and as prices fall supply will decrease. That’s because many of the larger producer countries economies are so dependant upon oil incomes that they will continue to pump oil regardless of falling prices and may even accelerate production( with the exception of OPEC) during periods of declining prices to make up for the shortfall in income by increasing volume. Hence it can fall more than the fundmentals would suggest.

So it would seem we are now somewhere near its long term price (which is well below the long term rate of inflation) but it will decline in the short term as recessionary impacts further curtail demand

However when there is a sufficiently large enough rise in its price previously uneconomic fields become feasible and this is true for much of the heavy shale mining which is now prevalent in Canada.

Cart who has a particular inertest in Canada , having resided there recently, sent me this article - Ironically, As Price Per Barrel Drops, American Oil Supply From Canada Imperiled
which further highlights the intricate web of supply that make price predictions under the 'peak oil' theory problematic.


Cart said...

It is fascinating watching the effect of assumptions on eggs to chicken hatch ratio. Certainly Canada has been caught in the trap, but it seems Sarah Palin’s Alaska is also facing an enormous revision of projections. Dear Sarah thought she could pre-spend money which has rapidly evaporated with the drop in oil prices.
I guess that is a trap for commodity based economies, though I note manufacturing has a similar effect. Still, there are some things, like energy and housing (and child minding), I’d like to see taken right out of trading regimes. A pipe dream I know, but dreams are still allowed.

Progressive Traditionalist said...

Of interest

Seraphine said...

so here is our chance to become less dependent on oil, and we don't have the money left to do so. hopefully, america develops a sound energy strategy before the price of oil starts goes up again.

susan said...

I think the peak oil argument is still relevant as there aren't any new and readily drillable reserves of light, sweet crude anywhere we know about. The fact of speculative investment having fallen on hard times is certainly true and as Sera mentioned now is definitely the time to invest in realistic substitutes. Are there any?

Michael Manning said...

But the speculators got off without so much as a slap on the wrist! That's what frustrates me.

lindsaylobe said...

Hi Everyone
Thanks for all of your insightful comments and for the graph PT. I replied individually and then realized my comments were so lengthy it made more sense to reformat in to another post; should the new post be of further interest I look foreword to hearing from you again !

Thanks once again for your interest

Progressive Traditionalist said...

re: Susan.
No, sorry, dear.
The world's largest oil reserve was discovered last year off the coast of Brazil.
It is due to be in production in two more years.