Tuesday, July 29, 2008

A Respite Not A Reprieve

Is the price of oil today too high given the fundamentals? Could be. Is it
too low? Could be. But one thing I'm sure that's too high is the confidence
on the part of those who insist they know the answer.

James Hamilton

Particularly dramatic in this growth has been China, whose petroleum
consumption between 1990 and 2006 increased at a 7.2% annual compound rate. It's always amusing to project these impressive exponential growth rates. If that rate of growth were to continue, China would be using 20 million barrels a day by 2020, about as much as the U.S. is today. By 2030, China would be up to 40 mb/d, twice the current U.S. consumption.


To summarize, I think we will see some net production gains this year, and
expect this to bring some relief for oil prices. But I cannot imagine that the
projected path for China above will ever become a reality. Oil prices have
to rise to whatever value it takes to prevent that from happening.

James Hamilton

Over the last couple of weeks, oil has gone from grasping for $150/bbl to sitting just over $120/bbl. So if oil continues to decline another couple of dollars (and I have no reason to think it won't), then strange as it seems oil will have dropped 20% from its high and we can officially declare a bear market for oil.

At the risk of stating the obvious, we don't know how long this will last. But now that the sheer shock of oil prices has abated a little bit, we have the opportunity to look at the bigger picture. We've all heard the story about how industrialization in China and India is going to drive the price of oil up, but the story doesn't end there. In the short term we can maximize oil production and in the long term we will be able to use electric power for transport.

The oil crisis has been brewing for a long time, and it will take a long time to unwind. By all means we need to drill for oil in ANWR or whereever we can find it, but even if we do, and even if the price of oil goes down to $70 or so, the oil crisis won't be over until we have a sustainable, reliable, and affordable source of energy for transport, and after that for energy in general.


Prior Peter, OSB said...

Does your last sentence mean that you are conceding the underlying insights of Gore 2000?

Any chance that you will write on Social Security or Medicare in the near future? I'd like to know your take on them, and I don't trust either major candidate at this point to be honest.

Koz said...

"Does your last sentence mean that you are conceding the underlying insights of Gore 2000?"

That's a big nugatory ghostrider.

Al Gore and the Democratic Party in general opposed just about every known way possible to produce energy: ANWR, offshore, clean coal, and nuclear.

Once solar or wind energy actually produce enough power to matter, they'll be against them too.

In Gore's case in particular, energy policy is mostly an adjunct to his views on the environment. One thing that's been flying under radar a little bit is that the usual case for global warming has gotten weaker over the last year or so, as the supposed "solutions" for it become less speculative and closer to reality.

I am a little bit less reactionary against a higher gas tax if somehow the price of oil does go down soon. In that way, I'm probably closer to Gore than I used to be.

As far as Social Security and Medicare goes, ever since Bush's attempted reforms failed, the ship has largely sailed on them as far as accommodating the upcoming demographic changes in America. Five years or so from now (maybe less) we'll have a big fight about cutting benefits vs. raising taxes. I know I'll be on the side of cutting benefits.