Oil/Gas Prices

[Pangloss]

Interesting article in Time magazine yesterday about what's behind and ahead of us on the price of oil:

http://www.time.com/time/business/article/0,8599,1853775,00.html?imw=Y

 

In a nutshell, they focus on the rather astonishing drop in demand in the US, which has fallen another 10% in just a matter of weeks. Furthermore, the Department of Transportation and many analysts are saying that the fall in US demand may be permanent.

 

Oil demand in the U.S. has dropped 10% in the few weeks, continuing a year long trend. According to the U.S. Department of Transportation, Americans drove 15 billion fewer miles in August, or 5.6% less than they did the year before. DOT says it's the largest ever year-to-year decline recorded in a single month. Over the past 10 months, Americans have driven 78 billion fewer miles than they did in the same 10 months the previous year — sure proof of what economists call "demand destruction."

 

And the drop in demand apparently extends to foreign markets as well, including China, which has been hit hard recently by the looming US recession, resulting in Chinese factory closures at an unprecedented rate (there were several stories on this last week).

 

Unfortunately I think we have to be realistic and recognize that with these foreign markets it's hard to call this "demand destruction". As iNow and POM and others here have pointed out, countries like China and India have a long way to go. And therein lies the problem -- what happens to demand, and the price per barrel, once the recession ends? American drivers may settle in at a lower rate, or even continue to decrease, but is that really likely with countries like China and India?

 

So I think we have a temporarily startling situation with the price of a barrel falling 50% from its high and showing signs that it might even hit the $50 mark soon. But I think it's clear that this is not an oversupply glut, but rather a reflection of the economic crisis. And if that's the case, and everyone agrees that fixing the economy is a desirable thing, then I think we have to consider the strong possibility that that price per barrel is going to fly upward once again at some point in the not too distant future.

 

What do you all think?

[iNow]

So I think we have a temporarily startling situation with the price of a barrel falling 50% from its high and showing signs that it might even hit the $50 mark soon. But I think it's clear that this is not an oversupply glut, but rather a reflection of the economic crisis. And if that's the case, and everyone agrees that fixing the economy is a desirable thing, then I think we have to consider the strong possibility that that price per barrel is going to fly upward once again at some point in the not too distant future.

 

What do you all think?

 

I tend to agree with that. It's going to go back up almost no matter what. How high it goes, and how low it goes before rising again, are uncertain.

 

I personally sort of liked the high prices, as we saw unprecendented support for cleaner technologies, and battery powered cars. I don't want to see that support weaken, it's far too important to our long-term health.

 

As for China and India, I hold out hope that since they are both so new to it, they have a very real opportunity before them to setup their infrastructure properly the first time, instead of having to go back through and "fix" things like we are in the States. Unfortunately, I'm not sure the price point is low enough for them to do so.

 

Again, I don't want decreased demand of 10% to be permanent. I want the decline of demand to be permanent, such that it KEEPS decreasing... but, you all knew that already, I'm sure.

[Realitycheck]

Remember the size of Chinese and Indian imports relative to ours.

 

Total Consumption by China in 2006 was about 7 mbpd, but only 3.5 of it was imported.

 

"India had net oil imports of nearly 1.7 million bbl/d in 2005. Future oil consumption in India is expected to show strong growth, to 3.1 million bbl/d by 2010, from 2.5 million bbl/d in 2005."

 

U.S. oil consumption for 2007 was 20.680 mbpd, down from 20.687 mbpd in 2006, and down from 20.802 mbpd in 2005, when the downward trend started. "The United States imported about 60% of the oil we consumed during 2006. About half of these imports came from the Western Hemisphere."

 

http://www.eoearth.org/article/Energy_profile_of_China

http://www.eoearth.org/article/Energy_profile_of_India

http://tonto.eia.doe.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_a.htm

http://tonto.eia.doe.gov/dnav/pet/pet_pub_analysis_cons.asp

Edited October 26, 2008 by agentchange

[Riogho]

You also have to think, that if all the chinese people are out of jobs, which pay less than our anyway, that they can't afford near as much gas as we can. So the fact that they make so little money anyway, and now they are all dropping jobs the demand is dropping.

 

It's correlated with why our demand is dropping, prices are too high for us to afford. You have to remember the world is in recession, not just the U.S.. So when the recession ends, oil goes back up.

[ecoli]

I agree. If prices in a free market reflect the best available information (efficient market hypothesis) then trying to "fix" the economy is bound to do more harm than good. Especially when it comes to things to artifically affecting supply/demand modules in things like alternative energy.

[iNow]

I agree. If prices in a free market reflect the best available information (efficient market hypothesis) then trying to "fix" the economy is bound to do more harm than good. Especially when it comes to things to artifically affecting supply/demand modules in things like alternative energy.

 

Yet you seem to be defining "harm" in a very narrow and limited way. You suggest that our intervention in alternative energy will do more harm than good, and seem to be applying that harm only to the concept of free market forces. That's fine, but misses several important variables, variables which truly need to be considered when making such decisions.

 

Primarily, the benefit of such actions on the environment, our health, and long-term survival are so high as to be intangible. When viewed in the proper context, the benefit of regulation and human intervention right now in alternative energy far exceeds any short term economic blips and damage to free market systems.

 

I also want to remind you that we don't have free markets. Free markets are an idealized ("spherical cow") version of the economy. We must take action in the REAL economy, not the one we think we should have.