For the second time in two years, Oil's choke hold on the economy is asserting itself. Acceleration in recovery causes acceleration of demand, and acceleration of Oil prices - which causes the economy to stall. That choke hold won't go on forever, though. There are three forces that will combine to bring it to an end: alternate fuels, conservation, and exploration.
1. Alternate fuels and technology
Perhaps the most promising alternate fuel to oil is natural gas. According to the EIA, natural gas reserves increased 11.3% in 2010. Nautral gas exploration in the northeeastern US, Texas, and North Dakota is proceeding robustly, and we can expect natural gas usage to increase over the next decade.
In addition to natural gas, alternate technology in the form of hybrid vehicles is finally making up a small but significant share of vehicle sales. In 2010, hybrid vehicles made up ~2.5% of all vehicles sold. As gasoline prices have continued to increase, in the first three months of 2011:
2. Conservation
The fact is that the 2008 Oil spike and the "great recession" have left a substantial dent in US Oil consumption, as shown in this graph of weekly usage:
Continuing high gas prices are once again having an impact an auto buying. While April as a whole logged in at 13.1 M vehicles sold on an annualized basis, the Detroit News reported that:
Over the short term, demand for fuel is inelastic, but over the longer term we can see that people do adopt strategies to conserve energy usage in the face of high prices. As in 2008, high gas prices are causing an increase in the use of mass transit. For example, in the Miami, FL area mass transit usage is up 11% compared with last year. Other areas, such as Philadelphia, have shown similar increases.
3. Exploration
In addition to opening up natural gas exploration, $100 Oil is causing renewed drilling for Oil in areas where it was previously unprofitable. As a result, US Oil production has actually increased in the last two years:
Additionally, deep water drilling in places like offshore Brazil, have led to discoveries such as this one noted in 2009:
As the Wall Street Journal reported in 2009:
In Summary, however, the Oil choke hold on the economy will not last forever. I claim no clairvoyange, but a good guess is that by 2013 or 2014, the combination of alternative fuels and technology, conservation, and exploration will relieve the current situation.
Growth in highly fuel-efficient vehicles far outpaced the rest of the market.Although this probably only means an increase to 2.7% of all vehicles so far, looking further out into the future, the recently released J.D. Power and Associates 2011 US Green Automotive Study
In the first quarter of 2011, hybrids increased sales by 33.9 percent, while the overall market grew by 20.2 percent. In March, small cars— such as the Ford Fiesta and Honda Fit—grew at almost twice the rate of the overall market, 30 percent compared to 17 percent.
...
Hybrids and small cars are even bigger in the used car market.
indicates major growth in consumer interest in green cars—including hybrids, clean diesel, plug-in hybrids and pure electric cars. The market research firm expects as much as 10 percent of sales to come from vehicles with these fuel-efficient technologies by 2016. That would represent a four-fold increase in the sales numbers for green carsIf $4 gasoliine becomes the norm, I suspect that estimate may be substantially to the low side.
2. Conservation
The fact is that the 2008 Oil spike and the "great recession" have left a substantial dent in US Oil consumption, as shown in this graph of weekly usage:
Continuing high gas prices are once again having an impact an auto buying. While April as a whole logged in at 13.1 M vehicles sold on an annualized basis, the Detroit News reported that:
April started strong, but took a dive as gas prices spiked, storms ravaged the Midwest and South, and parts supply shortages in earthquake-stricken Japan squeezed new car and truck inventories, analysts say.Furthermore, as I noted above, there has been a marked shift not just to hybrid vehicles, but also to smaller, more fuel efficient models.
Over the short term, demand for fuel is inelastic, but over the longer term we can see that people do adopt strategies to conserve energy usage in the face of high prices. As in 2008, high gas prices are causing an increase in the use of mass transit. For example, in the Miami, FL area mass transit usage is up 11% compared with last year. Other areas, such as Philadelphia, have shown similar increases.
3. Exploration
In addition to opening up natural gas exploration, $100 Oil is causing renewed drilling for Oil in areas where it was previously unprofitable. As a result, US Oil production has actually increased in the last two years:
Additionally, deep water drilling in places like offshore Brazil, have led to discoveries such as this one noted in 2009:
Brasileiro SA, Brazil's state-controlled oil company, says its tests show the Guara deepwater offshore field holds between 1.1 billion and 2 billion barrels of oil and initial production may start in 2012 with 50,000 barrels of oil equivalent a day.This deposit, known as the Guara field, is scheduled
to start pilot production in early 2013 at a rate of 120,000 barrels a day of oil and 5 million cubic meters a day of natural gas,, according to Petrobras.
As the Wall Street Journal reported in 2009:
When this is added to the Tupi and Lara fields recently found by the Brazilian oil giant Petrobras, the total yield could be close to 12 billion barrels. It has been years since deposits of this size have been found anywhere.The same article in 2009 reported on another huge find that has since taken on another significance:
BP (BP) last week said it found an oil field deep under the Gulf of Mexico that could yield as much as one billion barrels of oil and gas.Yes, I think we know about that last "gusher."
In Summary, however, the Oil choke hold on the economy will not last forever. I claim no clairvoyange, but a good guess is that by 2013 or 2014, the combination of alternative fuels and technology, conservation, and exploration will relieve the current situation.
5 comments:
NDD - interesting analysis.
One big issue, though, is that most of the solid peak oil analyses put peak of production of liquid fuels at 2013-2014 if not sooner. So it's likely we'll face a supply crunch of a greater severity than we have in the past.
The UK study on this from last year is a good summary:
The Oil Crunch
Anon -
Resorting to deepwater drilling IS Peak Oil. The fact that oil is now "normally" over $100/barrel IS Peak Oil. Peak Oil was NEVER forcasted to be a disastrous "crunch", but a long, painful transition to an era where oil is a luxury. High oil prices making harder-to-extract reserves economically viable was always inherently assumed.
We are never, ever going to see oil selling for $20/barrel again, inflation-adjusted or otherwise. This is not necessarily a catastrophe, but it is a painful reality.
Oil down $8.5 in a day, finishing below $100 for the first time since March. I really don't think that happens if it's all supply/demand. That has the stench of speculation to it.
Stocks are also falling fast in late trading. Nobody wants to be holding the bag when tomorrow's likely dismal employment report comes out.
On the plus side, I feel like there is a lot of last-minute skepticism for the April number. If we post something in the 130-150k range (still well below the conventional wisdom), I'd argue that's a good result (in the sense that our bacon's not quite as cooked as the last-minute thinking appears to be trending).
But my gut feeling (admittedly pure speculation) says sub-100k is in the cards, and that would be devastating. Bonddad usually rates the employment report on a scale of 1-10. May have to pull out the negative numbers for tomorrow, but I hope I'm off and all the circling sharks have just turned me too negative on the outlook this week.
Hopefully the fall in oil prices will break the chokehold on the economy allowing the recovery to regain any lost traction
It must be noted that peak oil happened in 2002-2003. That was when the most desirable grades of oil (the sweet lights) peaked. Since then there has been increased development and production of the more viscous sulfur contaminated types and of the bituminous (tar) sands. AS it happens, the largest remaining and relatively undeveloped sweet light reservoirs are to be found in Iraq, but even thought there may be multi-billions of barrels to be found there the fact of the matter is that demand is far outstripping supply of the sweet light. This is important because the sweet lights are everyone's pot-o-black-gold due to the ease with which they can be pumped and refined. The heavier and more contaminated grades such as that found in the Orinoco belt (Venezuela) are relatively plentiful for the moment, but as the sweet lights calamitously decline (as they are) the slack must be taken up by the heavier and more contaminated grades. This basically means that price will be increasingly driven by supply and the costs of pumping and refining...
When you consider that tar sands (where most of the remaining extractable carbon fluids dwell) are the most polluting and energy intensive of all you get the feeling that price is inelastic over both the short and long runs...
Its not a pretty picture. I do expect the current speculative oil bubble to deflate somewhat. And decreasing demand because of said bubble may have propelled us into another recession, but the era of cheaply extracted liquid energy is over. The practical result will be a race between decreasing supply and increasing efficiency and alternative energy development. Look for the suburbia of the long commute to become wasteland. Look for your neighbors to become expert gardeners and chicken farmers...
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