Paul Krugman: The Oil Nonbubble

Is the high price of oil price due to fundamentals or speculation?:

The Oil Nonbubble, by Paul Krugman, Commentary, NY Times: “The Oil Bubble: Set to Burst?” That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse.

Ten months later, oil was selling for $70 a barrel. “It’s a huge bubble,” declared Steve Forbes...

All through oil’s five-year price surge, which has taken it from $25 a barrel to last week’s close above $125, there have been many voices declaring that it’s all a bubble, unsupported by the fundamentals of supply and demand.

So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble? ...

Imagine what would happen if the oil market were humming along, with supply and demand balanced at a price of $25 a barrel, and a bunch of speculators came in and drove the price up to $100. ...

Faced with higher prices, drivers would cut back on their driving; homeowners would turn down their thermostats; owners of marginal oil wells would put them back into production.

As a result, the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand. This excess supply would, in turn, drive prices back down again — unless someone were willing to buy up the excess and take it off the market.

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding...But ... inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices ... had to happen to keep demand growth from exceeding supply growth.

Saying that high-priced oil isn’t a bubble doesn’t mean that oil prices will never decline. ... But it does mean that speculators aren’t at the heart of the story.

Why, then, do we keep hearing assertions that they are?

Part of the answer may be ... that many people are now investing in oil futures — which feeds suspicion that speculators are running the show... But there’s also a political component.

Traditionally, denunciations of speculators come from the left of the political spectrum. In the case of oil prices, however, the most vociferous proponents of the view that it’s all the speculators’ fault have been conservatives — people who you wouldn’t normally expect to see warning about the nefarious activities of investment banks and hedge funds.

The explanation of this seeming paradox is that wishful thinking has trumped pro-market ideology.

After all, a realistic view of what’s happened over the past few years suggests that we’re heading into an era of increasingly scarce, costly oil.

The ... odds are that we’re looking at a future in which energy conservation becomes increasingly important, in which many people may even — gasp — take public transit to work.

I don’t find that vision particularly abhorrent, but a lot of people, especially on the right, do. And so they want to believe that if only Goldman Sachs would stop having such a negative attitude, we’d quickly return to the good old days of abundant oil.

Again, I wouldn’t be shocked if oil prices dip in the near future — although I also take seriously Goldman’s recent warning that the price could go to $200. But let’s drop all the talk about an oil bubble.

Comments

[evagrius]

They're stashing the oil somewhere-probably under the Artic.
When the price is right, they'll sell it to the Chinese.

says...

"Is the high price of oil price due to fundamentals or speculation?"

False choice? Neither, unless you count leaving oil in the ground as speculation.

http://www.moslereconomics.com/2008/05/07/saudi-oil-production/

Looks to me like producer produced shortage.

[Winslow R.]

Last post was mine.

pk wrote: "But let’s drop all the talk about an oil bubble."

Once efficiency catches up, we will say exactly that. A drop of less than 10% in total demand and the Saudis, once again, lose control. It may not even take a recession this time, perhaps technology/efficiency will do the trick all on its own.

[bullbust]

The chutzpah of Krugman and academic economists is breathtaking.

All during the housing bubble, these armchair pontificators in their ivory tower were saying 'there is no bubble' while any one who was down and dirty in the market, trying to buy a house, could easily see what was going on. Did the armchair mavens at least do a double-check when the rag-tag masses cried bubble? Not at all, they did their math on the garbage statistics and declared the garbage output to be perfect. Housing is going up, because people could afford to pay more.

Now they are at it again. the down-and-dirty people say this
http://www.nakedcapitalism.com/2008/05/links-51208.html

Paul Krugman, New York Times. Krugman argues (as he has on his blog) that the lack of inventory buildup means that there is no oil bubble. The problem I have with that argument is we cannot be certain of the supposed lack of inventory increases. The New York Times, in a recent story on the runup in agricultural commodity prices, discussed how some farmers who cannot sell to elevator companies and are frustrated with the ways the options and futures markets are misbehaving are doing deals outside the exchanges, directly with sponsors of commodity funds such as AIG. AIG, which runs commodity index funds, buys the commodity, the farmer stores it for a fee, and the farmer buys it back later at a pre-set price. Again, does the inventory held with the farmer by a commodity index fund get recorded anywhere? And note further (if the author got it right): commodity funds are not supposed to buy commodities. But AIG, the fund manager, apparently did. If this is somehow to AIG's advantage (certain) it's a no-brainer that Goldman, which manages about 60% of the GCSI funds, is doing similar moves on a greater scale. And if private deals of the sort depicted in the article aren't recorded, we could indeed have more inventory that is widely recognized. (And remember, even if inventories are actually growing, bubbles can go a very long time before they burst).

Bottom line: more deals are being done OTC, and physical trades related to them may not be fully captured. Anyone with knowledge is encouraged to comment.

But the academic gasbags don't want to hear - after all part of the problem is that the cheap money being pumped by the Fed ends up in commodity speculation - and these gasbags will never ever say anything against the Fed. They all hope to run the Fed one day.

What a bunch of whores.

[hari]

Me thinks Fed policy is responsible for not only oil price escalation but entire gamut of commodity price jump - during this credit crunch crisis. Dollar depriciation is jakking-up gastank prices including all commodities priced in dollar. IMF issued an explicit explanation (I can't locate IMF statement right now) last week or so, by its Deputy, arguing that since 2002-2007 dollar depriciation has forced-up commodity unit prices in dollar denomination.

Of course, there is q' of hedge funds and investment banks piling into the commodities market for rendite - while stock markets are going no where right now.

PS>Mark should locate IMF statement to counter Paul's argument. I find Paul's argument *speculative* (at best) and not based on fundamentals. Me thinks oil prices are due to go south after summer is over....

[anne]

"The chutzpah of ------- and academic economists is breathtaking.

"All during the housing bubble, these armchair pontificators in their ivory tower were saying 'there is no bubble' while any one who was down and dirty in the market, trying to buy a house, could easily see what was going on."

This is a creepy lie.

[anne]

"What a bunch of ------."

This is creepy lying sexism.

[anne]

http://krugman.blogs.nytimes.com/2008/05/11/a-tale-of-three-cities/

May 11, 2008

A Tale of Three Cities
By Paul Krugman

In case you’re wondering, I didn’t write about public transit for tomorrow. But I did some homework on the thought that I might, and might as well put it here.

So here’s Exhibit A for the proposition that even in a nation with low overall population density, where the antelope roam and the skies are not cloudy all day, cities don’t have to be quite as auto-centric as they are in America.

Compare three metropolitan areas with roughly the same population: Atlanta, Boston, and Toronto.

Atlanta is the poster child for sprawl, and as a result it has hardly any alternatives to cars: 89 percent of workers drive; less than 4 percent take public transit.

Boston is an older city, with an extensive transit system from the days when most people didn’t have cars. Even so, 79 percent of the labor force drives to work, but 11 percent do take public transit.

And then there’s Toronto. It’s still more auto-centered than not — but 22 percent of workers take public transit.

Canadian gasoline is somewhat more expensive than in the US — but not European-level expensive. Otherwise, Canada looks a lot like America, and Toronto almost speaks the same language, eh? Yet a high-quality transit system and different land-use planning make a big difference.

What’s more, as far as I can make out from the data, a lot more Canadians than Americans (as a percentage of the population) have switched to public transit over the past year; because the system is there, they have more flexibility.

All in all, this comparison is a reason not to believe apocalyptic warnings about the long-run effects of energy scarcity: there’s a lot of substitution possible. America’s main problem is that we have a capital stock — cars, public infrastructure, and housing — designed for dirt-cheap oil. And the transition may be nasty.

[anne]

http://krugman.blogs.nytimes.com/2008/05/11/eia-question/

May 11, 2008

EIA Question
By Paul Krugman

I’ve been having a terrible time downloading data from the Energy Information Agency — painfully slow, nothing seemed to work. Then, for some reason, I decided to try logging into the Princeton VPN first — and everything was suddenly fine. Anyone have an idea what that’s about? Some sort of firewall to keep out the great unwashed, but an elite university is OK?

[Bob]

Thank God for Communism

It seems to me that we owe a debt of gratitude to Communism. From the end of WWII to the late 1980s we essentially had two groups of world economies - the communist/dictatorship economies and the capitalist economies. While the capitalist economies grew their per capita consumtion the others languished. However, now that the breaks are more or less off, the rest of the world is catching up and we are seeing scarcity in things like food and oil.

Perhaps conservatives will blame Ronald Reagan.

[save_the_rustbelt]

Economists have been praying to be able to beat down the Americans people with high oil prices for three decades.

Angry that many Americans do not worship before the throne of academic economics, the economists have been hoping to humble the masses to prove that the economists were right all along.

It is very difficult to reconcile the oil market events of the past six months with a free and open market, the up pressure seems to consistent.

And oil companies claim that higher retail prices are the result of higher costs, yet the profit margin spreads grow larger, indicating the prices are out racing the costs.

[bakho]

As the fundamentals take us closer to demand exceeding ability to supply, it allows the speculators to step in and manipulate the price of the remaining oil because that amount of oil is small enough that they can do so. Only by backing demand away from current supply can the speculators, cartels and other price manipulators be forced to lower prices.

says...

It is a non-bubble if there is no conservation to cut demand. A crash program to raise fuel efficiency would have the same effect of lowering oil prices as the CAFE standards of the 70s had.

[anne]

http://yaleglobal.yale.edu/display.article?id=10657

April 16, 2008

Clock Running Out on Irreversible Climate Change: Producers toy with scarcity, allowing fuel prices to soar while the earth edges closer to catastrophe
By Jim Hansen

NEW YORK - Fifty years ago, Yankee Stadium had about 70,000 seats. It seldom sold out, and almost any kid could afford the cheapest seats. Capacity was reduced to about 57,000 when the stadium was remodeled in the 1970s. Most games sell out now, and prices have gone up.

The new stadium, opening next year, will reduce seating to about 51,800. This intentional contraction is aimed at guaranteeing sellouts, increasing demand, allowing the owners, in short order, to triple prices or more. The owners have learned that scarcity will fatten their wallets. The plan may discriminate against the lower middle class, but as long as the owner is footing the bill without public subsidies, there may be little grounds for complaint.

Now fossil-fuel moguls are intent on hoodwinking the entire planet with an analogous scheme.

The basic trick is oil producers overstating fossil-fuel reserves. Government "energy information" departments parrot industry. Partly because of disinformation, the major efforts needed to develop alternative energies have not been made.

The reality of limited supply forces prices higher. Eventually, sales volume will begin to decline, but fossil-fuel moguls will make more money than ever. They'll continue to assert that there's plenty more oil, gas or coal to be found, aiming to keep the suckers on the hook. Indeed, they may find somewhat more in the deep ocean, under national parks, in polar regions, offshore, and in other environmentally sensitive areas. They don't need much to keep the suckers paying higher and higher prices.

Oil "reserves" suddenly doubled when Organization for the Petroleum Exporting Countries decided that production quotas would be proportional to official reserves. These higher reserves are, at least in part, phantom. Coal "reserves" are based on estimates made many decades ago. Closer study shows that extractable coal reserves are vastly overstated, consistent with present production difficulties and rising prices. The presumed 200-year supply of coal in the United States is a myth, but it serves industry moguls well.

Conventional fossil-fuel supplies are limited, even if we tear up the Earth to extract every last drop of oil and shard of coal. Tearing up the Earth to get at those last drops – Exxon/Mobil proudly advertises that they're drilling the depths of the ocean and searching the most extreme pristine environments – is as insane as the smoker who trudged 4 miles through a raging storm to buy a pack of Camel cigarettes to feed his nicotine addiction....

"Target Atmospheric CO2: Where Should Humanity Aim?" * and supporting material **

* http://arxiv.org/abs/0804.1126

** http://arxiv.org/abs/0804.1135

[zinc]

The price of crude has risen from $50 to 125 since Jan 2006, a little more steeply than PK would have us believe.

I don't really understand why economists have such a problem with the concept of market collusion. Prices are set at the margin and commodities tend to be short run price inelastic.
The exchanges are not trading oil, they are trading contracts the price of which, IMO, are susceptible to the fear of shortage. Price taking buyers, who are responsible for purchasing and ensuring a commodity for next months operation, are not likely to hold out for a lower price, as the great one suggests, no more than I won't go to work because gasoline has become exceedingly expensive. I will buy the stuff, thus helping to move inventory and supporting the price increase.

IMO, the futures markets are a capitalists delight, failing miserably at price discovery and efficiency. The impact of buying or selling of commodity contracts by the ETF's or GSCI on market price has been readily demonstrated. For instance, the sudden drop price as a result of the drop in weighting of oil by the GSCI. Not to mention the natural gas ripp-off by Amaranth and co-conspirators several years ago. The California energy crisis.... etc.

I am not convinced by PK's arguments.

says...

Bullbust,

Krugman did warn about the housing bubble in 2005 during the peak
http://www.nytimes.com/2005/08/08/opinion/08krugman.html
http://www.nytimes.com/2005/05/27/opinion/27krugman.html

also inventories of oil and grains are not too hard to track.
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/txt/wpsr.txt

CB

[blackswan]

Last year, a barrel of oil was selling for as little as the low $60s. The price of oil this year hit the low $120s. Did the price of oil DOUBLE because the world is using TWICE as much oil this year as it did last year? NO. Is it because the world's oil supply this year is only HALF of what it was last year? NO. So, logically, PEAK OIL did not cause the price of oil to DOUBLE.

So what did cause the price of oil to double? When oil prices went down to the low $60s, the Fed funds rate was at its peak, 5.25%. That gave us a STRONGER DOLLAR. Now, the Fed funds rate is 2%, its lowest rate in years. Consequently, we have a WEAKER DOLLAR and the price of oil is in the low $120s. This is what is known as CAUSE AND EFFECT.

The OPEC nations are sitting on massive reserves of US dollars. As the dollar losses value, their massive reserves of dollars also lose value. Consequently, they need more dollars to make up for the losses they suffer from a weaker US dollar. They only was they get more dollars is if the price of their oil goes up. In other words, THE PRICE OF OIL IS INVERSELY INDEXED TO THE VALUE OF THE USD. There you have it, CAUSE AND EFFECT.
Here are two links showing the relationship between the Fed funds rate and the price of oil.

http://www.eia.doe.gov/emeu/steo/pub/gifs/Fig1.gif

Fed funds rate graph:http ://library. hsh.com/?ro w_id=88

You can ignore these charts, and go back to believing these oil price hikes are due to "mother nature" and not the "motherfu***r banksters", and they'll have you just where they want you, and where they want every other sucker they can fleece. You see, the banksters, hedge funds and sovereign wealth funds, who already made money on the high-tech bubble, the housing bubble, the derivative bubble, and the stock market bubble, are now making money on the commodity bubble. It's the only ASSET CLASS bubble that hasn't burst. Know, that when it does, they will have covered their ASSets, and you will have lost your ASS.

But why believe me, when you can hear it from the horses mouth:

Mohamed Al Hamli, president of the Organization of Petroleum States, and who is also oil minister of the United Arab Emirates said: "The prices are high due to the fact of the recession in the United States and the economic crisis which has touched several countries, a situation which has an effect on the devaluation of the dollar, and therefore EACH TIME THE DOLLAR FALLS ONE PERCENT, THE PRICE OF THE BARREL RISES BY $4, and of course vice versa." .

He added that: "IF THIS (the dollar) STRENGTHENS BY 10%, IT IS PROBABLE THAT (oil) PRICES WILL FALL 40%."

If the U.S. economic situation improved from now to the end of the year "that would help the market to stabilize."

"I think the market is very well balanced... There is no shortage whatsoever of oil supplies," Mohammed bin Dhaen al-Hamli told Reuters.

Of course, you can assume al-Hamli is lying and Bush, with his ethanol subsidies, and his Anwar drilling will save the day rant, is telling the truth, but when has Bush, or for that matter, his bankster buddies, ever told the truth about anything?

Does OPEC want the price of oil this high? No, OPEC wants the dollar to gain value. It does not want oil at a price where Americans might feel uncomfortable enough to actually do something about their oil addiction. OPEC doesn't ever want Americans to find an alternative. Al-Hamli acutally threatens America if it continues to try to lessen its dependence on oil:

"ISTANBUL, Turkey: The president of OPEC said Wednesday that repeated calls by industrialized countries to reduce dependence on oil could lead to a reduction in supplies from the cartel.

"Today's policy announcements could translate into scarcity of supplies in the future," Mohamed Al Hamli, president of the Organization of Petroleum Exporting Countries, said at an energy conference. He noted that OPEC members are developing nations with limited resources, and it would be a "waste of badly needed funds" to invest heavily in oil production if demand is unclear."

[Organic George]

Recently the Chicago Board of Trade started to address a big problem. Farmers and Grain Elevator operators can no longer use the CBOT to hedge their risk due to unprecedented volatility in the futures markets.

The problem is the speculators, hedge, pension and index funds are creating such wild swings that hedging is not longer viable. These markets were developed to help reduce risk for owners of raw commodities, now the market is the playground for the over leveraged.

Most telling was that the COBT had initially proposed new regulations that would increase the positions funds could take in the futures markets but now these regs have been shelved due to the complaints from hedgers.

This is just another example of how the financial markets have been hijacked by the big players.

[anne]

"You can ignore these charts, and go back to believing these oil price hikes are due to 'mother nature' and not the '-------------- banksters' .... "

To the gutter, or to the GUTTER, Wilber. Gutter thinking, gutter language.

[Joe]

Bullbust

I don't know if it is or is not possible to miss oil inventory accumulation while residing in and bloviating from the ivory tower but I will say that Krugman had been calling the housing bubble for a couple of years before it was pricked. He did it by analyzing the numbers (i.e. cost to rent versus house prices and other data indicators). Viewing the whole forest is much more edifying then analysing a tree and extrapolating the condition of the forest.

[ken melvin]

Thanks Anne for the yaleglobal.

'Tis my observation that they will always charge as much as they can get by with; sometimes testing, if it sticks great, if not, well it was worth a try. No doubt markets can and do sometimes have an effect, but ...

[blackswan]

Do you ever put away you PC magnet? You might get more out of this blog, if your senses were not constantly overwhelmed by overly vigilant manure sniffing. Try opening your eyes, holding your nose, and then turning in your PC police badge. I've never encountered anyone as thin skinned or as easily offended. I've watched you react this way for years. It' so Phyllis Schlafly.

[Banker]

I do not think this is a producer price rise, rather it is real and will continue. I was one of the crowd that thought it was a bubble that would pop, now I believe that with Globalization and Emerging Economies growing very strong, Commidity prices are here to stay.

[BJ Feng]

Gone are the days where the US alone determined oil prices based on its demand. Gasoline consumption has been flat for the past two years, however total world demand for oil continues to rise thanks to China, India, and other emerging economies. Even oil producers are having to allocate more to their domestic market, but production capacity has not grown as fast as demand. We're right at the limits of production capacity today, versus a few million barrels of excess capacity a few years ago. And there doesn't seem to be any new oil production that can more than offset the falloff in production from old oilfields like the giant Cantarell oilfield in Mexico or the North Sea.

"On Friday PEMEX made it official. Production from Mexico's largest oilfield, Cantarell, fell from 1.99 million b/d in January 2006 to 1.44 million b/d in December. The company's overall crude production in December was 2.98 million b/d, falling below 3 million barrels for the first time in six years. Nearly a year ago, a leaked internal PEMEX study forecast that under the best-case scenario Cantarell's production would fall to 1.54 million barrels a day by the end of 2006 -- almost exactly what happened.

Mexican oil analyst, David Shields, expects the field's output to drop another 600,000 barrels a day by the end of this year. He says that Pemex will likely increase output by 200,000 barrels a day at other fields -- leaving the country with a net decline of 400,000 barrels a day by year's end."

So what we have is surging demand and production that doesn't seem to be able to keep up because it takes years for an oilfield to come into production. There also aren't many good spots left, all the potential lies within countries with unstable governments or outright hostile governments known to seize oilfields. Yet these governments don't have the ability themselves to find and get oil out of the ground. Perhaps there is some speculation and money chasing returns, but high oil prices do reflect the fundamentals, most nations are already pumping all they can, and stable nations like the US simply will not allow oil to be drilled outside of the old, exhausted places. ANWAR, the Florida and California coasts, all those are off limits, where is more oil going to come from, all at a time where car purchases are nearly doubling every year in emerging economies?

[Jay]

Of course it is a price bubble. George W. Bush caused high oil prices (simple post hoc ergo propter hoc argument should suffice) and he is leaving office in Jaunary. Once Bush leaves office everything will be better and oil prices will crash.

[blackswan]

One of the biggest problems is the belief that the US, a country with approximately 6% of the world's population, should have the right to use 25% of the world's oil. The rest of the world is now challanging that belief.

[anne]

http://krugman.blogs.nytimes.com/2008/05/12/why-oil-isnt-gold/

May 12, 2008

Why Oil Isn’t Gold
By Paul Krugman

One reference I didn’t end up using in today’s column was this piece * in Reason. It declares that “the oil market is coming to resemble the gold market” where “most gold traders don’t even ask the question of how much gold was mined last year or how much spare gold mining capacity there is. ”

I thought that was a useful comparison — because once you look at the numbers, you see how little the oil market resembles the gold market.

Here’s the key fact: as nearly as I can tell, private gold stocks — gold held as a store of value and/or for speculation — are equal to about 50 years’ worth of production.

Meanwhile, private stocks of crude oil ** are equal to about 50 days’ worth of production. Yes, we should also add stocks of refined products; and there may also, as Yves Smith likes to remind us, *** be some additional unrecorded stocks (in 1979, I remember, everyone was filling their gas tanks as often as possible, adding to the speculative demand); but the fact remains that oil prices are much more closely tied to the flow of production and consumption than gold, or any other good that is mainly held as an asset rather than actually consumed.

* http://www.reason.com/news/show/125414.html

**http://www.eia.doe.gov/emeu/steo/pub/gifs/Fig11.gif

*** http://www.nakedcapitalism.com/2008/05/links-51208.html

[Alex Tolley]

1. Even though the $USD has declined in value, the value loss is nowhere near as much as the rise in price. The Eu is seeing real and high oil prices too.

2. OPEC is a cartel and tends to follow the dynamics of oligopolies - ie members cheat and try to sell more when prices are kept high, above a fair price level. This time around it looks like they are unable to do so - why?

The short answer is that the peak oil hypothesis is probably correct. We are pushing up against the maximum production rates and new discoveries are diminishing.

As for how high oil prices can go, in another thread here is was indicated that energy and food represent a small part of US GDP. This means that we can bid up the price until it starts to hurt someone (e.g. poorer nations) or alternatives come on stream. Q1 year saw a 30% increase in US hybrid vehicle sales, indicating that gas prices were sufficiently high to encourage conservation. This is also the first time since the beginning of the era of automobiles that we actually have some serious development of electric cars.

If there is one thing that is good about peak oil is that the transportation sector cannot grow as fast as predicted, especially for cars. This should help to put some brakes on CO2 emissions, reducing its growth rate and buying us a little more time to transition to alternative energies.

[lonesome moderate]

I don't think that anyone who takes an honest look at the fundamentals can deny that oil will be at least $200 a barrel five years from now, barring worldwide economic recession. Even with a worldwide recession it'll at least maintain its current level.

Now, put yourself in the shoes of an oil sheik. You're trying to decide to pump an extra million barrels a day to satisfy world demand, money which your country doesn't currently need. Why in the world would you decide to pump the additional oil?? There aren't any potential investments for the proceeds that are as good as just leaving the stuff in the ground. You'd have to be NUTS to increase production.

You hear a lot of tortured logic whenever oil prices spike, from people who try to use short term supply numbers to mask long term trands. Yes, there is enough supply right now to satisfy current needs. The price is going up because the people who have the stuff don't see any reason to sell it at current prices, when future price increases are virtually guaranteed. Trying to point the finger wildly at "academic economists" or "speculators" isn't going to change that fact. Oil prices will continue to rise until the current price is close to the consensus forecast of the long term price.

[donna]

The reality is oil is still cheap relative to alternative sources of energy. As it becomes easier to get these alternatives on line, there will be more ways to distribute energy, and better conservation of oil resources. For now we're stuck with an economy that has refused to transition to alternatives, mostly from a national policy that has refused to support research and production of alternative energy. As this changes, we will be in better shape. Wind power and solar and other sources need to come online, but this takes some effort and investment.

For transportation, we could turn back to rail lines and build more mass transit, restructure our cities to put people closer to work, build smaller, more efficient housing and more efficient cars. The technology isn't that difficult, but when the country is run by oilmen and their friends, the willpower isn't their. The profits being made on oil are still obscene, and until this changes, we're not likely to see cheaper energy sources. The best the individual can do is conserve, modify their lifestyle to cut their own use of energy, and limit their own transportation costs in a way that works for them.

It isn't about oil shieks or production availability, it's about our own efforts to change the way we live. And the will to do that simply hasn't been there. We like our big cars and big houses and living hours from work to have those things, we really do.

[David in NY]

I've long thought Krugman's right. I've been hearing "speculation, speculation, speculation" ever since the rise started, mainly on business news shows. But nobody ever has evidence of that speculation. It's been clear to me that the business world just doesn't want to deal with a world of expensive oil, much less with the possibility of real oil scarcity. I guess that's because their world depends on growth, growth, growth, and the only growth they can imagine is the traditional resource-heavy development, which depends on cheap oil.

[Barkley Rosser]

This is probably a case of some of both, but I am mostly in agreement with PK. Low interest rates and low dollar and extra speculation may well be responsible for $10 or $20 worth of the crude price, but most of the price rise is for real, showing the clash of rising demand with limited supply.

I shall note only two things. One is that there are only five pools of oil in the world that produce more than one million barrels of oil per day. All are either stagnant or in decline.

Second, and really an extension of the first, is that by far the largest is al Ghawar in Saudi Arabia, which produces about 5% of world oil production. The Saudis have just spent several billion dollars to try and maintain production in the more productive northern end of it, which is clearly on the downswing. The Saudis just opened another major pool, but it cost them $15 billion, and this one requires injection of water to get the oil out.

So, I am not declaring that we are at "peak oil." Global production might still go up some more. But we are definitely at the outer limits of the easily gotten at oil. We are crashing up against very real limits of oil production.

Oh, and blackswan, littering your comments with lots of capitalized words is not a way to convince anybody of anything other than that you are shouting.

[Alex Tolley]

lm: Now, put yourself in the shoes of an oil sheik. You're trying to decide to pump an extra million barrels a day to satisfy world demand, money which your country doesn't currently need. Why in the world would you decide to pump the additional oil??

This article explains that Saudi production has peaked and thus they are no longer the traditional swing producer.

http://www.theoildrum.com/node/2331

This suggests that the arab sheikhs are not voluntarily keeping oil in the ground (why would they be doing that in the face of massive spending in th Gulf States) but involuntarily.

[Alex Tolley]

donna: For transportation, we could turn back to rail lines and build more mass transit, restructure our cities to put people closer to work, build smaller, more efficient housing and more efficient cars.

With the best will in teh world, it will take a generation or two to make much of a start on this. Only cars and putting in buses will be achievable in a shorter timeframe.

Where I live, in Silicon Valley, San Jose built a light rail to serve the city - it is an expensive white elephant that cost a lot of taxpayer money, yet has abysmal ridership. BART does well, serving SF, but that is because traffic and parking in SF are horrendous.

On the peninsula, it is impossible to use public transport - and will remain so unless we have a massive upgrade in the system, making it more like a city service, than a rural one.

As for cities... There is an classic quote about how to show a city of the future - just step outside and look. Cities do not change - Rome's center is about the same as it was 2000 years ago. The City of London hasn't changed since I born in teh 1950's. Road patterns are pretty much fixed, so restructuring for transport must work with the existing layout. No gleaming arcologies will be built in major cities, only for new ones. Hosing stock turns over very slowly, most houses don't get rebuilt after 50 years, even in California.

Bottom line, the city structure, housing and transport patterns are pretty much fixed. We can modify them, add efficient vehicles, shared vehicles, telecommute etc. But nothing that substantial will change for most people who live and work today.

This is the inertia that will make transitioning to a "new economy" very difficult, maybe even impossible. Maybe the only possible transition is to one of decay, much like the end of the Roman Empire once the legions were gone.

[Cynthia]

My hunch is that skyrocketing fuel prices are mostly based on well-grounded fundamentals and have little to do with flights of speculation. Just hope my hunch is dead wrong, otherwise we, as a species, may indeed be facing a Easter Island scenario. But instead of us wondering why Islanders cut down the last palm tree, other species will be wondering why the hell we sucked up the last drop of oil!

[Consumption Smoothing]

Oil is effectively being "stashed" right where it has been for centuries. With currencies being constantly devalued, oil producing nations have figured out that deferring consumption by simply keeping oil in the ground until overseas products are needed is more efficient than trading the oil for depreciating paper currency. That is, OPEC et al are smoothing consumption of consumer products produced in other nations. They have switched to a just in time delivery system, where oil is not pumped until they are ready to trade it for refrigerators and such.

In the past, they pumped like mad, and traded the oil for currency. That didn't work out too well, as the currency kept losing value, and oilers were able to buy less in the future with the currency than they would have been able to buy had they traded oil for the goods when needed.

Constantly devaluing the value of savings in the form of currency motivates people to seek alternative methods of deferring consumption until needed. US domestic savers switched to storing value in homes instead of currency, now OPEC has switched to effectively storing value in oil instead of currency.

[methinks]

Have you seen this?
‘Perhaps 60% of today’s oil price is pure speculation’: http://globalresearch.ca/index.php?context=va&aid=8878

[lonesome moderate]

Alex--we don't really disagree. My point was simply that, whether we are at peak oil or still a few years away from it, the price increases are clearly the result of predictable and unstoppable market forces.

Consumption Smoothing--exactly what I've been trying to say, but you said it better, thanks.

[anne]

"In the past, they pumped like mad, and traded the oil for currency. That didn't work out too well, as the currency kept losing value, and oilers were able to buy less in the future with the currency than they would have been able to buy had they traded oil for the goods when needed."

Blah, blah, Austrian blah. Money, bad bad bad.

says...

What Soros has to say on "super-bubble"
http://www.npr.org/templates/story/story.php?storyId=90328243

Today's (May 12) NPR Morning Edition featured an interview with George Soros who has an interesting analysis of US decline and advances bubble theory on oil and food as A global responses to US dollar decline as preferred trade and investment currency.

In short what he says is...

-The US has consumed the deposits of savings from foreign depositors and these have become weary of the IOU accumulation.

-Some of these depositors have created sovereign accounts in order to insure their investments and reduce their exposure to US business decision-making and short sighted government economic policy.

-The sovereign accounts act like commodity futures investors and have been keen on energy and food.

-The rising prices and supply issues in crude oil are driven by decisions by oil exporters (who host sovereign accounts) to delay converting oil in the ground to USD.

-The rising prices in foodstuffs is due to the failure of the market in adapting to the investment impact of sovereign accounts on commodity prices.

-The faith based economics that imbues free unregulated markets with mystical power of foresight and unfailing correctness misses the point that they are no wiser than the collective juncture of actions, mistakes, information and emotions. Regulatory overload has been replaced with market policies that go too far.

[agricanto]

I try to post using my Typekey account only to see my posts labelled "says". The Soros NPR ref is Agricanto. No I am not a farmer. But I like soil and plants and the economics of agriculture.

[agricanto]

Blackswan hits it on the head

says...

"Blah, blah, ___________ blah. Money, bad bad bad."

What vile, creepy xenophobia.

[Alex Tolley]

cynthia: otherwise we, as a species, may indeed be facing a Easter Island scenario. But instead of us wondering why Islanders cut down the last palm tree, other species will be wondering why the hell we sucked up the last drop of oil!

We will no more disappear as a species, that we did when any of the other examples of cultures disappeared (cf Diamond's "Collapse"); What may happen is that the fossil fuel based civilizations may collapse, leaving the rest to continue.

This is not unprecedented. The ancient world relied on slaves. Rome was constantly importing slaves to do more work, but eventually even that had to reach a limit ("peak slaves?")

One hopes that we will transition well to non-fossil fuel based energy. Solar as the source is effectively unlimited. Despite the propaganda from the status quo (cf todays WSJ article on energy subsidies) I see a lot of momentum building towards alternative energy sources like direct solar, and indirect solar - wind, wave etc. Even nuclear seems to be getting renewed attention, although I still have my doubts about its use.

Unlike the Easter Islanders, the Greenland Norsemen, the Maya (the list is long) our culture is the first, science based, and potentially decentralized, one that could make intelligent choices, even on a planetary scale. Whether we do so is another matter, but I don't see us descending into another dark age unless we really make dumb decisions.

[Bruce Wilder]

I think Alex Tolley is a bit too pessimistic. It is true that we have a built an American lifestyle infrastructure on cheap gas and the automobile, and we have been building out on that paradigm for 100 years. (2008 marks the 100th anniversery of the Model T!)

But, the rate of all change has been accelerating. We're getting progressively better at it; the telegraph disseminated faster than the postal service, the telephone faster than the telegraph, the cellphone faster than the telephone -- radio spread faster than newspapers, television faster than radio, the internet faster than television.

If we did decide, as I expect we should, say, to rebuild the rail network, we could incorporate vastly superior techology, and the system could be built in a fraction of the time to build the interstate highway system. There are a lot of places, whose economic viability would be enhanced by having rail pass-through, which previously suffered from being too far from a major airport or city center. (Do you have any idea what it costs to get from La Guardia or Newark to Connecticut?)

And, the amount of slack in the American economy is very large; huge numbers of people are engaged in pointless salesmanship and advertising; we really could afford to dial it back and go on more vacations. And, the concentration of wealth makes taxation a no-brainer: we know who has the money.

The toughest problem, at the moment, is that we really don't know what shape a post-petroleum energy infrastructure should take. There are lots of promising possibilities, but no clear winner, and a winner may not emerge, or may not emerge for some time. But, in the meantime, we have enormous scope for conservation.

[Bruce Wilder]

Alex Tolley: "The ancient world relied on slaves. Rome was constantly importing slaves to do more work, but eventually even that had to reach a limit ("peak slaves?")"

It is a little sketchy, but the economy and trade of the ancient world did decline, probably from multiple coincident causes, one of which was the slaves kept dying off in plagues, leaving large areas of the Roman Empire with serious population deficits.

[methinks]

Right on, Blackswan.
So many americans hate and FEAR the truth. Why? Because they might have to reevaluate how they see the world or give up some of their cherished illusions.

[anne]

George Soros:

"The rising prices in foodstuffs is due to the failure of the market in adapting to the investment impact of sovereign accounts on commodity prices."

Since 2005 the demand for grain for fuel has increased from 20 million tons to 50 million tons annually, however for 7 of 8 years the demand for grain has increased faster than supply. Irrigated land through the world, for some reason increased only till 2000. Irrigated land per capita is declining. For some reason, again, productivity in grain production has slowed since 1990 from 2.1% annually to 1.2%.

[anne]

http://www.earthpolicy.org/Updates/2008/Update72.htm

April 16, 2008

World Facing Huge New Challenge on Food Front: Business-as-Usual Not a Viable Option
By Lester R. Brown

Meanwhile, on the supply side, there is little new land to be brought under the plow unless it comes from clearing tropical rainforests in the Amazon and Congo basins and in Indonesia, or from clearing land in the Brazilian cerrado, a savannah-like region south of the Amazon rainforest. Unfortunately, this has heavy environmental costs: the release of sequestered carbon, the loss of plant and animal species, and increased rainfall runoff and soil erosion. And in scores of countries prime cropland is being lost to both industrial and residential construction and to the paving of land for roads, highways, and parking lots for fast-growing automobile fleets.

New sources of irrigation water are even more scarce than new land to plow. During the last half of the twentieth century, world irrigated area nearly tripled, expanding from 94 million hectares in 1950 to 276 million hectares in 2000. In the years since then there has been little, if any, growth. As a result, irrigated area per person is shrinking by 1 percent a year.

Meanwhile, the backlog of agricultural technology that can be used to raise cropland productivity is dwindling. Between 1950 and 1990 the world's farmers raised grainland productivity by 2.1 percent a year, but from 1990 until 2007 this growth rate slowed to 1.2 percent a year. And the rising price of oil is boosting the costs of both food production and transport while at the same time making it more profitable to convert grain into fuel for cars....

After seven years of drawing down stocks, world grain carryover stocks in 2008 have fallen to 55 days of world consumption, the lowest on record....

[anne]

http://www.earthpolicy.org/Updates/2008/Update72_data.htm

April 16, 2008

Wheat Prices, January 1999 through April 2008 (figure)

Corn Prices, January 1999 through April 2008 (figure)

Soybean Prices, January 1999 through April 2008 (figure)

Countries Importing Half or More of Their Grain Consumption, 2007 (table)

Top Ten Exporters of Corn, Wheat, Rice, and Total Grains, 2007 (table)

World Grain Production, Consumption, and Balance, 1960-2007 (figure and table)

World Grain Consumption and Stocks, 1960-2007 (figure and table)

World Grain Stocks as Days of Consumption, 1960-2007 (figure)

World Grain Production, 1950-2007 (figure and table)

World Grain Production Per Person, 1950-2007 (figure and table)

World Grain Harvested Area, 1950-2007 (figure and table)

World Grain Harvested Area Per Person, 1950-2007 (figure and table)

World Irrigated Area, 1950-2003 (figure and table)

World Irrigated Area Per Person, 1950-2003 (figure and table)

World Grain Yield Annual Increase by Decade, 1950-2007 (table)

U.S. Grain Production, Fuel Ethanol Use and Export, 1980-2007, with Projection to 2008 (figure and table)

[BJ Feng]

"One of the biggest problems is the belief that the US, a country with approximately 6% of the world's population, should have the right to use 25% of the world's oil. The rest of the world is now challanging that belief."

Our right comes from the fact that we are willing and able to pay for it, period. The same reason you have the right to type on your computer in your luxurious abode while people are homeless and starving elsewhere. You should thank the system that allows you to be productive and sell your labor for a good price. As for using 25% of the world's energy, when that number was accurate a few years ago, we also were producing around 30% of the world's GDP. It's not us being wasteful, it's countries like Nigeria which use a greater amount of energy than the GDP they produce in world terms.

The technology for plug-in hybrids and outright electric plug-in cars is already available. Ford will have a plug-in by 2009 (at least that's what they say). That means we have to start building more powerplants and expand the grid. There is still plenty of nuclear fuel around, but we have to start building more plants now because it takes years to get one online. No plant can be built near populated areas, and invariably some threatened plant or animal exists on whatever unpopulated area you think of. Legislation has to be written to limit the legal challenges environmentalists use and streamline the process. Perhaps a law that requires only EPA approval for a powerplant to be built, forbidding and shielding energy companies from any environmental lawsuits related to building after approval. We also have plenty of coal, and cleancoal technology. I won't even bother commenting.

There was no need for government to fund alternative research in the past because of oil's cheapness. Any alternative would never be viable, and indeed all that money given to Ford, GM, and various companies for research have been wasted. Those alternatives quickly become outdated thanks to new technology. Now that alternatives can be viable in the near future, a rush of investment is being made, all without government funding--like magic. Just look at all the new IPOs of companies with solar in their name.

And as for OPEC holding back, everyone is pumping, or trying to pump at full capacity except for Saudi Arabia, and they don't have the capacity they once did. Production for Venezuela is down, not because of a conscious decision, but because a lot of talent left CITGO after the failed coup and Chavez's revenge afterwards. Competent workers were replaced by corrupt cronies and oil production is in decline though Chavez desperately needs the money to fund his social programs. Likewise, Mexico's production is down thanks to years of underinvestment because the government needs the money so badly for social programs, exploration and development were put on hold. Production is down in Nigeria thanks to civil unrest. Iraq is just now getting back to pre-war levels, but the entire system needs maintenance that was neglected. I see no evidence of countries deliberately holding back oil, back in the 1970's oil producers thought high prices would last forever too. This time might be different, but I doubt they are confident enough in their predictions to pare back output.

They also have to see the writing on the wall as countries are looking for alternatives. These high prices make alternatives viable, a smart move would be to decrease prices down to a point where alternatives are no longer viable, perhaps $60-70, so that no future competition can be created. But for all their talk, they're not doing that because they can't, production just can't be increased fast enough. It would be very dumb for these oil producers to allow a new industry that could replace their industry, to form if they had control of the situation.

[BJ Feng]

Is it safe to blast the government for the stupid, inane ethanol policy now? If the entire US corn crop were turned into ethanol, it would only supply 7% of our gasoline needs. Already a fifth of the crop is being used for ethanol. And these are the wise people who we should trust to direct our futures? They can do better than the ignorant market?

[anne]

"Already a fifth of the crop is being used for ethanol."

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table14

U.S. Fuel Ethanol Use, Grain Production, 1980-2007, with Projection for 2008

2002 25 of 294
2003 30 of 345
2004 34 of 386
2005 41 of 363
2006 54 of 336
2007 81 of 414

2008 114 of 400 projection

[paine]

first we have the st paul of 96
on trade/wage interaction
now
the st paul of tomorrow
on the great oil price surge

makes me see the virtue
of an official court augur

[Alex Tolley]

BW "I think Alex Tolley is a bit too pessimistic. "

Apart from my tongue in cheek-ness, I don't think that I am pessimistic on the speed of transition. Contrary to the assertion that accelerating technological progress should nelp, what I see in actual infrastructure development is a massive slowdown. How long did it take to build the Golden Gate bridge in 1933 - 4 years. How long to replace the Bay Bridge that partially collapsed with the 1989 Loma Prieta earthquake - it hasn't even been started. Virtually every basic infrastructure project in the US now comes in over budget and delayed. At the rate China is building, maybe we should hire them to do the work?

The problem is that human developments are evolutionary - cities evolve and their history dictates much of how they can develop. If it turned out that we had no fuels for cars, it would be next to impossible to put in place some massive public infrastructure of buses and trains to service the suburban sprawl. More likely, the suburbs would decay, and new patterns of living and work would emerge. In other words, if we abandon cars, the roads will most likely be left to rot, rather than being replaced with monorails or some such new development, except in the cities where the space will be used for building or refitted for pedestrian use.
The Roman roads were a good example of what happens. Once the legions left, it wasn't as though people didn't still travel with carts. However, the stones were taken for other buildings and walls, leaving just the smooth dirt tracks that marked their passage. Will the west be any different this time around?

So what happens if we radically reduce automobile use? Initially buses might be used to take the commuters, but over time, the roads will decay, repairs being put off indefinitely and people will slowly migrate back to cities to shorten their travel times and the road connections between towns will become much poorer, perhaps at pre-freeway levels.

Although I use the words "decay" and "rot" and associate it with the decline of great civilizations like Rome, the result may be actually better. The natural world may be able to reassert itself in the new spaces, much of our communication may become electronic, travel becomes a vacation desire, rather than a work necessity.

I don't doubt that there will be fantastic new technologies coming along, but we should bear in mind 2 things:

1 Large scale infrastructure will only change incrementally, unless those changes are cheap (like cellphone towers) and do not encroach on existing requirements. Building will change more slowly and road layouts almost not at all.

2. The future patterns of technology will likely be very different from what we expect by extrapolation. In other words, the C20th century did not have super "horseways" or vacuum pipe delivery systems as the Victorians might have imagined, nor did we get the personal flyers that the early age of flight envisaged. SF author, Charlie Stross once wrote a speech (I think) about how we were thinking about material objects being moved faster in the mid-C20th, yet vehicle and personal mobility did not hugely increase, instead we focussed on moving information rather than objects around.

The C21st century may finally start to see the limits to [single planet] growth and with it we may see the end of the current economic system, and a new one emerge.

[Bruce Wilder]

Alex Tolley:
How long did it take to build the Golden Gate bridge in 1933 - 4 years. How long to replace the Bay Bridge that partially collapsed with the 1989 Loma Prieta earthquake - it hasn't even been started. Virtually every basic infrastructure project in the US now comes in over budget and delayed.

Not always. The Santa Monica Freeway was repaired quickly after the 1994 earthquake.

AT: "The future patterns of technology will likely be very different from what we expect by extrapolation."

Certainly, reality makes the writers of Sunday Supplement Features look foolish. But, that might be because they were foolish.

The truth is that we usually do proceed by extrapolation. We layer the new technology onto a paradigm first drawn by the old technology. We followed rivers and cowpaths. Then we built roads, then canals, than railroads, then highways . . . We have mail, then telegrams, then faxes, then e-mail, then instant messages . . .

We're running up against the limits of the planet's carrying capacity, but we're doing so with the great advantage of a huge cognitive surplus and a century or more of incremental progress, which is giving us remarkably efficient technologies. The 18th and 19th century industrial revolutions created some exciting novelties. We date the "modern" from the initiation of such novelties: modern architecture from Paxton's Crystal Palace (and from steel and elevators), modern art from the consequences of photography, modern politics from Andrew Jackson and universal (white) manhood suffrage, and on and on. But, once those cowpaths have been initiated, we hardly notice how progress accelerates in what follows, if the novelty is folded into the familiar. The cellphone was a huge innovation, but because it was an analogue to a wired telephone, it seemed to fit a familiar pattern. The infrastructure of wired telephones is being swept away by the internet and the cellphone, and replaced by something which costs a fraction of what it is replacing, and it is happening within a single generation. The last telegram was sent in 2006; the last switched telephone connection will probably complete before 2026.

The great obstacle is overpopulation. How that is handled I hesitate to imagine. But, combined with the acceleration of technological progress, that almost ensures some kind of accidental near-suicide. We can proliferate some toxic chemical or practice (think freon and ozone) over the whole planet on some unfathomable scale before we even recognize the consequences. That's the source of my pessimism.

[BJ Feng]

It's too hard to speculate on what type of new transportation system might evolve, there are too many variables and factors that have to be accounted for. I'm not sure if the need for personal mobility can be removed or supplemented by technology. Is it likely that people will want to live like the Jetsons, where goods are delivered to a person's house right after being ordered, and video communication is the norm? Will people still want to congregate and meet face to face even if they don't have to? If so, then a personal vehicle like the car is absolutely necessary. Before the car, was the horse, which indicates that the need for transportation that is personal and available immediately is very important. Public transportation is a second-hand option left to those who can't afford their own cars, or in places where restrictions (parking) or fees are high enough so that the benefits of personal transportation are outweighed by the costs.

In short, I don't think car-like transportation methods will go out of style. And since we have roads, we might as well use them. So the question becomes how to power our new cars to run on something other than liquid fuels. Battery technology has vastly improved as well as hybrid technology. A plug in hybrid that can get 400 miles per charge and run completely on biofuels is now possible. Acceleration has never been a problem for electric cars, they can accelerate faster than gasoline powered cars, the main obstacle was always the distance per charge, and the charge time needed. The charge time is still pretty high, but perhaps a system could be invented where "charge stations" have fully charged batteries waiting and would swap your used battery with a charged battery. All batteries would have to be interchangable, but such a system could work in theory.

However it will take a good number of new plants to support our transportation energy needs. There is bound to be high cost and turmoil during the transition period, but once a victor emerges, costs will begin to decrease. That's why I doubt that we will see high energy prices forever as some pessimists believe. Things still have to shake out and there is no clear cut winner yet from all the alternatives. Like with the HD-DVD vs. Blueray battle, costs will be high until things shake out, and no doubt there will be people left holding on to obsolete technology when it's all said and done.

[Bruce Wilder]

AT: "Charlie Stross once wrote a speech (I think) about how we were thinking about material objects being moved faster in the mid-C20th, yet vehicle and personal mobility did not hugely increase"

Of course, because the previous 100 years had seen huge increases in vehicle and personal mobility. Our great seers are likely to project huge increases in computing power, because that's what we have been experiencing, even though any decent physicist can see the end of the Intel "computing power doubles every 18 months" paradigm. And, though the power of molecular biology has building inexorably for 50 years (the double-helix structure of DNA was discovered in 1953), it has had only a scarcely noticeable impact so far on daily life and the shape of civilization.

[RW]

RE: The Santa Monica Freeway was repaired quickly ...

A lot of freely flowing money, a huge time bonus and a smart, tough contractor made that happen but the bonus for finishing the job early nearly doubled the original bid price; not sure how often you could do that although in the case of SM freeway there wasn't much choice (I had to drive the detour five days out of seven during the 74 days it took to finish the job and it wasn't any fun although to be honest the intact freeway didn't move much faster when it was rush).

[paine]

guys
how did we get to forecasting from crude oil market dynamics
too much big picture
not enough little logic
where's jay when we need him

tell me you all are satisfied with krugs qed
on his non spec driven conjecture

i'm not

far from it
paul is missing the real point

his "model " is a quick draw stick figure
trying to capture a breugelian subject

[Patricia Shannon]

If the Saudis are saving their oil for their future, they are acting more responsibly than the U.S. has been doing.

[Alex Tolley]

BW: I am not disagreeing with you regarding the pace of technological change. What I am arguing is that things that do need to be done - re-engineer building to be more efficient, redesign urban and suburban layouts and communities, build public transportation are very slow to achieve in a time frame that will work in the peak oil/GW time frame. I'm sorry, but major cities are not going to become much more energy efficient by lumping all building into a single structure (or external covering) or going underground or any number of possible rebuilds because historically that rarely happens. The Trade Towers are being rebuilt, much like big chunks of Europe,after WWII, because they were destroyed. The vast number of old brownstones will not be rebuilt for generations. They'll be fitted with whatever technologies are cost effective, but that is about it. The NY grid road system will survive as a recognizable feature for thousands of years, even if the only people who care are archaeologists.

Maybe we don't need to do anything so drastic. Maybe cheap alternative energies, new materials, different patterns of commerce will be enough. I hope so. But I'm not sure I would bet on it.

As for overpopulation, there is no doubt that we are running up against the limits as seen from the past 8000 years of agriculture and living patterns. But the fact is that there is enough solar energy falling on this planet that we could feed a lot more people if we had to. It might mean vertical farms, factory grown food, recycling to space station levels, but the energy is there to do it. Would we want a world as populated as Brunner's "Stand on Zanzibar" - I don't particularly relish it, but I grew up with the idea of open spaces and wilderness, but my grandchildren may be more comfortable in an artificial environment, much like in "Logan's Run".

Bottom line is that I am neither optimistic nor pessimistic, but I do consider the risks of assuming that everything will work out alright, and history tells us that some cultures collapsed because it didn't.

[reason]

Wow, some people here are really deep in denial. Strange, also, that some people talked about grain and metals here when this article was specifically about oil. It is absolutely true that people have been saying it is speculation for years, but inventories haven't been rising (unlike what has happened now with housing). As for a doubling of price implying a doubling of demand (oh my, go back to school and read about elasticity).

And a ten percent increase in efficiency buys us just 3-4 based on current demand growth.

Look PK has an awfully good record of having being right. I would be very careful in assuming that he is wrong. Check your own assumptions first.

[tinbox]

In what way could Krugman be wrong? He makes no actual prediction but carefully says oil could go up or down by 1-2 stardard deviations with typical volatility. So could he be wrong about the drivers of normal volatility? Not really, because "bubble" is not rigorously defined.

[anne]

http://krugman.blogs.nytimes.com/2008/05/13/stranded-in-suburbia/

May 13, 2008

Stranded in suburbia
By Paul Krugman

[Picture] A drive too far.

The Oil Drum * has this nice picture from the Sydney Morning Herald about the percentage of income Sydney area residents will spend on gas — er, petrol — if the price rises substantially. The outer suburbs are, not surprisingly, hard hit.

Maps for US metro areas would presumably look similar.

This is really our big problem: we’ve made long-lasting investments — in infrastructure, in housing, and to some extent in our auto fleet — based on low oil prices. Those past decisions are what make today’s high prices such a big problem. In the long run we can adjust, but in the long run …

* http://anz.theoildrum.com/node/3968

[Lafayette]

bullbust: What a bunch of whores.

May I suggest you change your language or leave the forum?

No? OK, I'll say it anyway. Your comment may have made some good points but was gross to the extreme in it manner.

[Bruce Wilder]

Alex Tolley: "What I am arguing is that things that do need to be done - re-engineer building to be more efficient, redesign urban and suburban layouts and communities, build public transportation are very slow to achieve in a time frame that will work in the peak oil/GW time frame."

And, yours is a good point.

I would say it somewhat differently. I don't know if you would count my restatement, an improvement.

Civilization elaborates a economic and social paradigm, or pattern or framework (pick your metaphor), building by incremental progress within that framework, large shifts and great achievements. Our present civilization elaborated a paradigm of living out of a fossil-fuel-driven industrial revolution and the conquest of a larger, partly unsettled wild world, which is now deeply embedded in an infrastructure of roads and buildings and cultural habits, which is profligate in its use of fossil fuel energy and resources from the natural world. That paradigm of suburban living -- of detached buildings and auto transportation and ever-cheaper food and fuel -- was designed under an assumption of cheap fossil fuel energy and access to abundant, previously un-utilized natural resources. Retro-fitting the accumulated infrastructure of that paradigm will retard our ability to shift to a more energy-efficient and less-greenhouse-gas-emitting economy, even as the collapse of the natural world's abundance deprives us of natural resources. Sufficient pressure on society and economy from rising resource costs and shortages, combined with the handicap of adapting an obsolete and profligate civilizational paradigm to lower energy-use, less gg-emission, may well cause the fragile organization of civilization itself to collapse.

I don't have any way to calculate on the future. I just absorb impressions, only some of which have any kind of objective basis, let alone a well-modeled quantitative aspect.

I think Gregory Clark has made the useful point that the industrial revolution started out as something, which only involved a small part of the world, a small part of the world population, who then expanded outward, using other parts of the globe, initially, for support.

The combination of involving a very large world population in industrialism and technological progress, with an accelerating technological progress, is, to my mind, what makes civilization and the world an increasingly fragile place.

I think of the example of freon, punching a hole in the ozone layer, almost before people realized what they were doing, with their air conditioners and hair spray. Each new "freon" disseminates to a much larger market, much faster, reducing the time we have to notice the consequences.

And, we're doing it, now, too, with CO2, not freon.

Although, in theory, we could probably house 10 billion people, and feed them, in a static world, made artificial and controlled, ours is not a static world, and I'm not sure we have the resources to make it completely artificial and controlled. And, we need a natural world to attenuate risk and absorb our mistakes.

Small island civilizations can collapse, because they are too small, to support the specialization humans need to do their best work, and because there is no larger society or resource-base, which can absorb and correct critical errors.

Continental empires and civilizations can run their course, lasting a thousand years or more, before they have played out their string. The Roman Empire and Hellenic Civilization of the Ancient World died, I think, of old age.

Planet earth is in danger because the population of our civilization is too large and extensive, and the pace of technological progress too rapid, relative to the size of the Planet to absorb and attenuate error. We've made a mistake, and it is a doozy.

[hari]

Listen now to my (70years old) optimism!

When I lived/worked professionally in Vienna (Austria) for more than a decade, in 1980s, I was impressed with comfort of City Trams and their ability to move passengers across the City on the Danube (+1 Million). After the oil crisis, in 1974, European Cities with Trams received an incentive to expand and move inner city dwellers to work and home - and weekends in the countryside on the Danube.

Stockholm and its pristine archepelago is now linked with underground electric tubes (if you don't want to take the boat service). The County of Stk is now completely linked with tubes to get people to work and home without traffic jams and whatnots. My +30 yrs old son doesn't own a car (yet). My daughter and her growing family reside in the archipelago....and have ready access to inner city at any given time of the day. But she works from home....

Policy makers have done a great job of pricing tube travel based on monthly/seasonal cards including specials for tourists adventureous to get out and see for themselves. Cars have become extinct in inner city life....

Because of ideological and other policy considerations, BART type of transport system (Bay Area) could have been easily developed to connect not only Long Island but all the way across New England. LA County is a sad case of mismanagement when it comes to public transport. May be they will finally decide to built-up public transport system in order to save the environment and energy cost.

A lot can be done at city and county level although costs have escalated and federal funding will become imperative for such public transport system(s).

How is it possible that a continental country has not cared to develop its inter-state public transport system until now?
Ask Lafayette for tech/transfer of TGA in France....

[hari]

Its TGV which runs in France!

[Alex Tolley]

BW: I think I would broadly agree with your last comment. They seem to echo Diamond's ideas about collapses.

Given the path we have taken, it is now a race to determine if technology will be sufficient to make the world work or not. We are very much in a Red Queen's race. Let's hope we are smart enough to make good choices.

[anne]

http://krugman.blogs.nytimes.com/2008/05/13/more-on-oil-and-speculation/

May 13, 2008

More on Oil and Speculation
By Paul Krugman

One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it.

Here’s my picture:

[Picture]

It’s not complicated

If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price.

Now it’s true that oil supply responds very little to price, and that empirical estimates of the short-run price elasticity of demand, like this one, * suggest that it’s low — say -.06. But even so, the math of a sustained, large bubble quickly becomes daunting. Say the demand elasticity is -.06, and that you believe that the current price is 40% above the level at which end-use demand equals supply. Then you have to believe that 2 million barrels a day is disappearing into secret hoards somewhere — secret, because it’s not showing up in the OECD inventory data. That’s a lot of oil. And bear in mind that people have been claiming that there’s an oil bubble for years.

So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.

* http://ideas.repec.org/a/bla/opecrv/v27y2003i1p1-8.html

[anne]

"So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going."

"So my challenge to people who say there’s 'a grain] bubble is this: let’s get physical. Tell me where you think the excess supply of grain is going."

[anne]

Sorry:

"So my challenge to people who say there’s [a grain] bubble is this: let’s get physical. Tell me where you think the excess supply of [grain] is going."

[anne]

http://matthewyglesias.theatlantic.com/archives/2008/05/less_talk_more_investment.php

May 13, 2008

Less Talk, More Investment
By Matthew Yglesias

Lately, I've been noticing that there's a weird ideological element to debates over whether the current run-up in oil prices is driven primarily by speculation or primarily by the fundamentals. Why, I wondered, would it break down like that? Now that I've read it, I think Paul Krugman nailed it yesterday: * If oil prices continue to rise, we'll probably see more call for government intervention in public transit and energy efficiency, and "I don't find that vision particularly abhorrent, but a lot of people, especially on the right, do. And so they want to believe that if only Goldman Sachs would stop having such a negative attitude, we'd quickly return to the good old days of abundant oil."

Of course you can run this argument backwards -- I prefer walkable, transit-oriented places so I'd like it to be the case that objective reality is trending in a manner that will make more people share my preferences. That said, Krugman's argument seems fairly persuasive to me.

But that said, the right way to resolve this dispute isn't with punditry, it's with speculative investments. A person who really thinks he has reason to believe we're in the midst of an oil bubble could earn a lot of money off that belief. Seeing conservative institutions deciding to invest funds in selling oil short would be more persuasive than any number of arguments.

* http://www.nytimes.com/2008/05/12/opinion/12krugman.html

[Alex Tolley]

anne: "So my challenge to people who say there’s [a grain] bubble is this: let’s get physical. Tell me where you think the excess supply of [grain] is going."

Despite PKs claims, this can be done in the short term, although he is right that this cannot be sustained in the long run.

The mechanism is to buy futures contracts that are settled by delivery. So a speculator buys enough contracts for next year's harvest knowing that delivery will put a strain on teh spot price as we get towards delivery. No inventory is accumulated, it is still seed growing in the fields. When the contract expires and delivery is demanded, it is the same as creating a short squeeze and teh price of the commodity will get much higher.

Classic economics would suggest that high prices would create more production, which is why cartels and oligopolies are unstable, because there will be cheating. But what if the production cannot increase? With farming grains, that could be because we have maxed out production due to available land and fertilizers. Added strain from biofuels and conversion to meat certainly helps. Even better if you own the supply, you can take supply off the market by simply growing less.

What about oil? Peak oil implies we are up against the production limit. Producers thus can withhold just a little production to use the price inelasticity to favor large price rises whilst knowing it will be difficult for other players to cheat.

With oil, the large producers cut back on production in the guise of delays to new field production. Price inelasticity keeps the price up and it is also very difficult to get more oil produced.

Is this "speculation" in the traditional sense? Not if you mean the typical financial market speculator. However it gets complicated if the financial markets are being used by the producers. Suppose the producers deliberately buy futures contracts themselves to increase the apparent demand for oil. This sucks in a lot of money that takes the short side of the contract on the assumption that it is bogus and the price will fall. But the producers can manipulate production levels because, as I said before, more production is not available. The shorts are squeezed, the longs are rewarded well and everything looks legitimate. Again, the inventory buildup is just oil not pumped that would have been pumped to fully meet demand.

PK is fair to point out that the prices are not high due to pure speculation, but manipulation of supply (ala Enron in the California energy market) is supposedly not legitimate either.

[anne]

Alex Tolley:

"So my challenge to people who say there’s [a grain] bubble is this: let’s get physical. Tell me where you think the excess supply of [grain] is going."

Despite PKs claims, this can be done in the short term, although he is right that this cannot be sustained in the long run.

[Right, but agricultural productivity has fallen markedly since 1990.]

[anne]

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table13

World Grain Yield Annual Increase by Decade, 1950-2007
Decade

Annual Increase (Percent)

1950-1960 2.0
1960-1970 2.5
1970-1980 1.9
1980-1990 2.1
1990-2000 1.2
2000-2007* 1.2

[anne]

http://www.earthpolicy.org/Updates/2008/Update72.htm

World Grain Yield Annual Increase by Decade, 1950-2007
Decade

Annual Increase (Percent)

1950-1960 2.0
1960-1970 2.5
1970-1980 1.9
1980-1990 2.1
1990-2000 1.2
2000-2007 * 1.2

* Annual increase over eight years.

Between 1950 and 1990 the world’s farmers raised grainland productivity by 2.1 percent a year, but from 1990 until 2007 this growth rate slowed to 1.2 percent a year.

[anne]

http://www.earthpolicy.org/Updates/2008/Update72.htm

April 16, 2008

Meanwhile, on the supply side, there is little new land to be brought under the plow unless it comes from clearing tropical rainforests in the Amazon and Congo basins and in Indonesia, or from clearing land in the Brazilian cerrado, a savannah-like region south of the Amazon rainforest....

During the last half of the twentieth century, world irrigated area nearly tripled, expanding from 94 million hectares in 1950 to 276 million hectares in 2000. In the years since then there has been little, if any, growth. As a result, irrigated area per person is shrinking by 1 percent a year.

[What might this mean? I do not know.]

Meanwhile, the backlog of agricultural technology that can be used to raise cropland productivity is dwindling....

[Can this be true?]

[anne]

http://matthewyglesias.theatlantic.com/archives/2008/05/less_talk_more_investment.php

A person who really thinks he has reason to believe we're in the midst of [a grain] bubble could earn a lot of money off that belief. Seeing conservative institutions deciding to invest funds in selling [grain] short would be more persuasive than any number of arguments.

[Interesting.]

[Alex Tolley]

Anne - I'm not arguing that we are in either an oil or grain speculative bubble. I am arguing that we can have one without the necessary inventory buildup that PK requires from supply-demand graphs. He's correct in the long term, but I think the financial markets can create a short term, artificial demand shift to the right through the use of futures contracts. Since the price elasticity for some products is very low, this creates price spikes.

To reiterate with oil. If you are long the 1yr future, you are paying now for the guaranteed delivery of the oil at the strike price. That contract acts as a signal for demand. Obviously if you have to take delivery, then it gets inventoried, just as would be predicted. But if the oil supply is not expanded to meet demand, then the contract prices will start to rise in anticipation of a demand shortfall. If you can collude with a producer to restrict supply, then you can take delivery of the oil at the strike, while the contract seller will have to pay the now very high spot price to meet his delivery of the oil and just hand it back to the market (or the producer) to put back into the market.

This is obviously not pure speculation, but it shows signs of such due the holding of futures contracts by financial players. In reality it is just either very judicious playing or it could be supply manipulation. Either way, it works because the supply cannot be easily expanded at this point, so creating apparent excess demand can push the market into a buying panic.

[reason]

But Alex, people have been saying there has been a speculative bubble in Oil for years. I agree, in the very short term (less than about a year) it is possible, but reality will bite quickly.

[reason]

Alex,
while I think oil suppliers are almost certainly (I believe the Saudis have explicitly said this) holding back production (and this is asset management not speculation), I cannot believe the grain market is manipulable by suppliers like you said. There are too many players and too much variability. A particular crop could be manipulated by a financial speculator with enough buying power and enough leverage, but he would end up holding lots in storage unless there really was a correctly forecast stortage. In that case, this is classic good speculation, bringing FORWARD the price increase and stimulating extra supply.

[Alex Tolley]

reason - I did not say that there was any speculative bubble, just that it is theoretically possible to have one in the short term without apparent inventory buildup and helped by current production capacity limits.

As far as grains are concerned, the more prosaic explanation already provided is likely correct. Oil is possibly about deliberate or accidental supply manipulation, again possible under the very tight capacity limits.

[anne]

Alex Tolley:

"I'm not arguing that we are in either an oil or grain speculative bubble. I am arguing that we can have one without the necessary inventory buildup that PK requires from supply-demand graphs. He's correct in the long term, but I think the financial markets can create a short term, artificial demand shift to the right through the use of futures contracts. Since the price elasticity for some products is very low, this creates price spikes."

There is no reason to believe this is so now, however.

[Alex Tolley]

anne - cf my reply to reason.