Q: Will we see $3 gasoline before we see $5?

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"Q: Will we see $3 gasoline before we see $5?"

A: “Who knows?” and “It doesn’t really matter.” Much higher gasoline prices that are sustained for a long, long time are now inevitable.

peak_oil2.jpgThe fundamentals in the oil market are that we are in the beginning stages of peak oil. Supply can no longer keep up with demand, which has kept soaring even in the face of record prices. The U.S. Energy Information Administration has the surprising statistics:

Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels…. Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels.

That’s right, even after “the largest half-year consumption decline in volume terms in the last 26 years” in this country, global demand continues to grow 1 million bbl/d each year. Why?

Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India.

Yes, speculation overextends every move in market price — but why shouldn’t people speculate that oil prices will be much higher in the future? That seems like a very solid bet. And yes, a rising dollar can temporarily help lower prices — but we are headed for a $10 trillion cumulative trade deficit just in oil between now and 2020. So which way do you think the dollar is headed long-term?

Ultimately only much, much greater demand destruction can stop the inexorable rise of oil prices. And that obviously requires much higher prices than what we’ve seen in the first half of this year!

Global consumption is now about 85 million barrels a day. Until the last few years, the United States was the major contributor to rising oil demand. From 1995 to 2004, China’s annual imports grew by 2.8 million barrels a day. Ours grew 3.9 million. Since then, growth has come mostly from China, India, the Middle East countries themselves, and other developing countries that subsidize their fuel.

The world just can’t deal with oil demand rising one million barrels a day or more year after year. In January, Jeroen van der Veer, chief executive officer of Royal Dutch/Shell, e-mailed his staff that the world will peak in conventional oil and gas within the decade. He wrote: “Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.” It used to be unheard of for oil executives to talk about limits to oil production. Now it happens all the time.

John Hess, chairman of Hess Corp., a global oil and mineral exploration company, said recently, “An oil crisis is coming in the next 10 years. It’s not a matter of demand. It’s not a matter of supplies. It’s both.” In October, Christophe de Margerie, CEO of French oil company Total S.A., said that production of even 100 million barrels a day by 2030 will be “difficult.” In November, James Mulva, CEO of ConocoPhillips, the third biggest U.S. oil company, told a Wall Street conference: “I don’t think we are going to see the supply going over 100 million barrels a day … Where is all that going to come from?”

In the short-term, I suppose it is possible that we can go back to $3 gasoline, although that would probably require a deep global recession, and prices would only stay low for the extent of the downturn.

But the far more important point is that it is now simply too late to adopt policies that can prevent much higher oil prices, as high as $300 a barrel in 10 years, if you believe oilman T. Boone Pickens. Why?

Replacing oil in the transportation sector requires strong government action two decades before a peak because of the time needed to replace vehicles and fuel infrastructure. That was the conclusion of a major study funded by the Department of Energy in 2005 — yes, the Bush DOE — on Peaking of World Oil Production. The report notes:

The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

If we start an aggressive move soon to end our addiction to oil, to shift to highly fuel-efficient vehicles and plug-in hybrids, we can perhaps spare our children from the worst impacts of peak oil (and, of course, global warming). But that require a far more progressive President than we have had for the last eight years.

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14 Responses to Q: Will we see $3 gasoline before we see $5?

  1. John Hollenberg says:

    Joe, the phrase “which has keeps soaring” should read “which keeps soaring”. Otherwise, excellent article.

    [JR: Thanks.]

  2. John McCormick says:

    Saudi Arabian motorists pay 42 cents/gal and its oil consumption grew 300,000 bpd from 2002 to 2007. As SA acquires more wealth, demand for more domestic oil consumption and electification (oil and gas fired) will increase. Add Quatar, UAE, Kuait, even Algeria to the domestic consumption increase and the oil supply projections become almost meaningless.

    It means that must less oil going into the world market while world oil production increases.

    Maybe that is a good thing since cheaper oil prices will: cause SUV owners to wait it out a bit longer; boosts SUV sales; and, fry our children’s future.

    John McComrick

  3. charlie says:

    No, no, no and no.

    Primo, the post should be titled $2 gasoline, not $3. We are likely going to a see gas in the $2 to $3 range for a long time. Why?

    Incremental US demand destruction.

    The US demand destruction is being caused by US consumers moving off giant SUVs, and marginal changes to driving behavior. The SUVs are gone and not coming back. Marginal changes in behavior may or may not revert back if gas goes below $3.

    The current spike is non-US demand will also abate. Sinopec just announced they are not importing any gasoline. The Chinese stockpiling which has been going on for six months will stop after the Olympics. The margin of surplus oil is now running about 3 million b/d. Yes, Saudia Arabia and the Gulf states will continue to enjoy massively cheap oil. If we took every large SUV and gave it to the Saudis, their increase in demand will still be a small pond compared to our ocean.

    I am all for plug in hybrids. If you want them, tax the hell out of gasoline. According to Joe, plug in hybrids won’t require us to radically shift our electric infrastructure, so I don’t see the “radical” shift that requires government intervention.

    Instead of more subsides, we need a real conservation policy: drive down our gasoline use 1% a year. Real time MPG gauges, tire pressure monitors, reducing congestion, variable insurance based on miles driven, and traffic monitoring could do that.

  4. David B. Benson says:

    Looks to be a good time to start a horse farm; everybody is going to need one or two.

  5. John McCormick says:

    Charlie, are you and I on the same planet.

    You said:

    [The US demand destruction is being caused by US consumers moving off giant SUVs, and marginal changes to driving behavior. The SUVs are gone and not coming back.]

    Do you get outside much? SUVs are not gone. They are being filled at the pump just like they will be when the price goes down.

    Come on. Think what driver reaction is now and will be in the future as prices drop.

    John McCormick

  6. Ian Lucas says:

    Hmm. I’m all for a move away from gasoline. I agree that high gasoline prices are here to stay.

    But are high prices down to Peak Oil? Maybe. Oil production has to peak sometime. And yes, I’ve read Blood and Oil and listened to Matt Simmons.

    Then again, maybe not. For one angle on the “maybe not” case, built on a principle that is usually pretty reliable (follow the money), see http://www.gregpalast.com/obama%E2%80%99s-secret-war-profiteering-tax/#more-2026.

  7. Peter Foley says:

    With a massive build out of coal-to-liquid plants the long term price of liquid Hydro-carbons could actually drift down to 3.00$ gallon long term.

    The USA needs to speed the switch to coal based fuels to balance trade and lower the need to pander to various tyrants and terrorist funders.

    [JR: There probably isn’t enough coal to make up anything but a small fraction of oil supply, so it won’t set the price, but will follow it. And of course it would destroy the climate for the next 50 generations.]

  8. charlie says:

    John:

    In 2005, at the height of the giant SUV boom, Harpers estimated that an improvement of 1 MPG by every SUV in the country would result in an 900K b/d a saving. Granted, that is a rough estimate but it is a start.

    VMT is down by about 10 miles/month for every car in the country. Again, not a perfect measurement, but gives you a sense of the size of driver behavior is in current demand destruction.

    Given than large SUVs used market value is down by 50% since last year, that is a strong marker that something is going on with SUV sales. And yes, those SUVs have to go somewhere but anecdotal evidence is they are being shipped overseas (latin america and middle east)

    And yes, I get outside. Granted in Arlington, VA, not a typical community. But SUVs/CUVs as a whole are less than 1/4 of cars I see daily, and I see maybe one large SUV a day. Other data points: F150 fell from best selling vehicle in 2008 (where it has held place for 20+ years) to fifth. Other SUV sales are down 30-40%. So yes, I am confident in saying large SUVs are going and will soon be gone.

    I also picked up a Toyota Landcruiser for myself as a third car- used, but the price wasn’t as low as I hoped. So large SUVs are being also moved to non-commuting driving. I expect to put 2000 miles a year on it.

  9. john says:

    Charlie:

    Did you read the post? It’s not about what’s happening in the US — as the rest of the world adopts our lifestyle, they replicate our consumption patterns.

    You can have all the demand destruction you like in the US — incremental or otherwise — and with $2,500 cars for sale in India, global demand will outstrip supply from now on.

    The only way we will get $2.00/bb oil is if the world gets serious about carbon and gets of the stuff …

  10. Rick C says:

    Joe,

    This seems like an appropriate moment to bring Partnership for a New Generation of Vehicles (PNG) that George Bush killed in 2001 at the request of GM, Ford and Chrysler. :-( These were magnificent cars made of the latest carbon fiber and light metal alloys that were unmatched for strength to weight. They were all hybrids. The GM Precept got 80 mpg. The Ford Prodigy got 72 mpg and the Chrysler ESX-3 got 72 mpg. The car companies said they were too expensive to manufacture and that the public would not go for them. My question for you is could these cars have been built using these light weight materials with hybrid drive trains and still have been competitive with conventional cars?

  11. Lamont says:

    International demand destruction is going to occur. Japan and all of Europe are slouching into recessions. Give it time and the non-OECD demand will level off.

    We rebound up to $150/bbl again and setup a double top in oil before it drops below $100/bbl though.

    Then we’ll probably see it ping-pong around doing a dance between supply and demand and recession and expansion for the next decade or two.

    Peak oil only suggests that we’re going to see an absolute peak in supply at some point (my bets are that 90Mbd will never be exceeded on a yearly basis). It doesn’t say anything about what will happen to prices, since that is dependent upon how much demand there is for oil. Peak oil does not suggest that oil prices must monotonically increase for ever. At some point there will become a peak price beyond which the economy simply has to contract. Personally, I think that $150/bbl is around that point.

  12. John McCormick says:

    Lamont, you overlook a very important dynamic when you say:

    [At some point there will become a peak price beyond which the economy simply has to contract. Personally, I think that $150/bbl is around that point.]

    Middle East countries and China (and likely India and Russia, though I am not certain about that) subsidize gasoline purchase. One estimate has Saudi Arabian pump price at 42 cents/gallon. If the subsidizing governments who are also oil exporters do not end that destructive practice, their exports generating much internal new wealth will finance more car purchases, more driving. And, as their populations acquire electric gadgets including air conditioning, their electricity demand will grow and be met by new oil and natural gas-fired capacity.

    I rarely, if ever, see any reflection on exporter nations’ increasing domestic demand in projections on peak (plateau) production and price.

    Put that into your equation and see if a contracting global economy is enough to offset the growth in exporter demand.

    John McCormick

  13. David B. Benson says:

    Locally gasoline is down to $3.999 today. Down 6.6% from the peak.

  14. shop says:

    But the far more important point is that it is now simply too late to adopt policies that can prevent much higher oil prices, as high as $300 a barrel in 10 years, if you believe oilman T. Boone Pickens