History Will Repeat; Some Rules Never Change
All this silly talk of so called Peak Oil is just another reminder of how our friends on the left side of the house have such remarkably short memories. Thus, it's good to see someone like Steve Forbes state the obvious and declare that oil prices are being driven through the ceiling due to a bubble generated by overenthusiastic oil speculators. This is something that I have believed for some time, despite shrill declarations from the left - and from their allies, the greens - that absurdly high oil prices are here to stay. Suddenly they are emboldened to declare that the market system and the exploitation of resources is inherently wrong, and here is the proof - measured in vastly expensive oil. The price mechanism has turned on its master and is going to send us to the wall! Best change everything now.
Not so fast. In the energy crisis of the very early 1980s, oil jumped to what would be US$90 a barrel in today's money. And - of course - the market stepped in. Oil companies made enormous profits at such an inflated price, and they went on an exploration binge to increase production and thus make even more, and after a few years a lot of extra oil came onto the market. Prices came back down to earth. Supply and demand. Pretty simple, huh? And why would things be any different today? Well...they aren't. I can absolutely state that oil prices will fall substantially some time soon. Here are some factors that could or will make oil prices fall, categorised in the short, medium and long term.
Short term - Economic downturn of a major market. If my prediction is correct and China does suffer a severe economic correction, the oil price will fall through the floor. Since China is used as a major factor in justifying the current high prices, an economic collapse in that country would place particularly strong downward pressure on oil. We could very well see international oil prices languish at 1998 levels - that is, US$12 a barrel. 1998 was the year that major oil producer Russia defaulted on its sovereign debt and Saudi Arabia almost went bankrupt.
Medium term - Oil companies will want to produce more oil to exploit the high prices. They will spend considerably more on exploration. More oil will be discovered and rushed to market. More supply equals lower prices. As you're reading this, a bout of new exploration is being planned and taking place. We'll be seeing the results of that in a few years.
Long term - If I'm wrong and the above two factors do not materialise (and I'm certain that one or both will), sustained high oil prices will make companies pour resources into research and development of alternatives. The more expensive oil becomes, the faster the oil age will draw to a close. Humans are ingenious creatures. There are plenty of alternative energy sources that can be developed.
Greens might declare victory at the prospect of my long term prognosis. However, the alternatives may be far less palatable than wind farms dotting the countryside. I'm talking about (the currently non-viable, though with a bit of R&D...) oil shale, steaming coal for gas and nuclear power.
That notwithstanding, I think the short and medium term scenarios are far more likely. These sky high oil prices won't last. I'll stake whatever shreds of my remaining reputation on that!
Not so fast. In the energy crisis of the very early 1980s, oil jumped to what would be US$90 a barrel in today's money. And - of course - the market stepped in. Oil companies made enormous profits at such an inflated price, and they went on an exploration binge to increase production and thus make even more, and after a few years a lot of extra oil came onto the market. Prices came back down to earth. Supply and demand. Pretty simple, huh? And why would things be any different today? Well...they aren't. I can absolutely state that oil prices will fall substantially some time soon. Here are some factors that could or will make oil prices fall, categorised in the short, medium and long term.
Short term - Economic downturn of a major market. If my prediction is correct and China does suffer a severe economic correction, the oil price will fall through the floor. Since China is used as a major factor in justifying the current high prices, an economic collapse in that country would place particularly strong downward pressure on oil. We could very well see international oil prices languish at 1998 levels - that is, US$12 a barrel. 1998 was the year that major oil producer Russia defaulted on its sovereign debt and Saudi Arabia almost went bankrupt.
Medium term - Oil companies will want to produce more oil to exploit the high prices. They will spend considerably more on exploration. More oil will be discovered and rushed to market. More supply equals lower prices. As you're reading this, a bout of new exploration is being planned and taking place. We'll be seeing the results of that in a few years.
Long term - If I'm wrong and the above two factors do not materialise (and I'm certain that one or both will), sustained high oil prices will make companies pour resources into research and development of alternatives. The more expensive oil becomes, the faster the oil age will draw to a close. Humans are ingenious creatures. There are plenty of alternative energy sources that can be developed.
Greens might declare victory at the prospect of my long term prognosis. However, the alternatives may be far less palatable than wind farms dotting the countryside. I'm talking about (the currently non-viable, though with a bit of R&D...) oil shale, steaming coal for gas and nuclear power.
That notwithstanding, I think the short and medium term scenarios are far more likely. These sky high oil prices won't last. I'll stake whatever shreds of my remaining reputation on that!
posted by James Waterton at 9:18 pm
10 Comments:
I think you're right too.
I think there are a lot more impediments to exploration and opening up of new fields than there was in the 70s and 80s, ie. the greens locking more oil out of reach with political means.... but even if they do this, I hope you're right about a hastening of the post-oil technologies listed.
Cheers,
Steve
Hey Steve,
The Greens won't be able to lock up squat if economies starts suffering due to high oil prices. For example, if oil prices are popularly seen to be the cause of economic woes in the States, how fast do you reckon Congress will let Chevron Texaco's drill rigs into the currently off-limits parts of Alaska? Slightly OT, the international economy hasn't been affected much by the high oil prices because oil is less important (relative to other energy sources and as a proportion of the global economy) now than in the early 80s.
Could you please elaborate why you see the Chinese economy running off the rails. I do not see them having a problem until the medium term; the tea leaves look good for China for the rest of the decade to me.
My guess is 2020 before they start having major problems.
Oh, sorry, I clicked the link.. banking problems. Hmm, yeah but you can do wonderful things with accounting, as Japan has proved.
Yeah if China sank, oil would too, but I think China can keep going for the rest of the decade.
The Chinese banking problems are a LOT deeper than ever seen in Japan. You're right, much can be done with accounting. This is precisely how the big Chinese government-owned banks are still able to operate, even though they're insolvent. Like I said in the article, 60% of the country's enormous savings pool is kept in these banks; banks that continue to use this source of funds to write loans that will never be repaid. Another point to consider is that - whilst banks are always a critical part of an economy - Chinese banks are particularly critical, because such an enormous chunk of the people's wealth is tied up in them, relative to other nations such as Japan. Chinese have few places to put their money, bar the banks. They're forbidden to own foreign shares, and the Chinese stock exchange is laughably small and stuffed with companies that no one native (foreigners are all rushing in, of course) would want to own parts of, anyway. Already, an enormous chunk of the people's wealth has been loaned out to others (mainly the decrepit state owned enterprises I mentioned in the article) who have no intention of repaying. Hundreds of millions of Chinese have already lost a vast amount of their wealth - and they won't realise it until enough of them try to withdraw their money.
It is conceivable that the Chinese bubble will stay inflated until the end of the decade, however if the American economy stumbles and consumption falls, China will collapse. If China's banks stumble, China will collapse. If enough people become unemployed in China (and there are a lot already), China will collapse. There are too many tripwires littering China's path to prosperity to make me think they have a solid shot at the prize this time round.
See that is where I'm reasonably optimistic- the Chinese economy is now tied to that of the West, and I think as long as the Americans do okay, China can 'hold the line'. (Though its true that I'm just guessing here.) But while Americans are pumping billions into Chinese manufacturing.
Okay, you've sold me on this idea to the point that, next time the American economy gets a cold, China's economy is going to get SARS. Very good arguement.
However, when that will be... I don't know how the Americans have kept their economy going come to that with Bush's ghastly budgetary practices.
Thanks so very much for taking your time to create this very useful and informative blog.
Impressesed.
Well, that could be true.
hehe =)
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