Is oil price self limiting?

Vortex · Post by **Vortex** » 30 Jan 2010, 20:15

The price of oil will rise as its availabilty reduces.

However at some point it will essentially price itself out of the market i.e. when it is way too expesnive for almost all forms of transport.

At that point it's use will be limited to plastics, chemicals etc which can afford a high oil price.

I wouldn't be surprised if that limiting Peak Price could be quite low - in the $100s rather than $1000s of dollars per barrel.

Any thoughts?

Andy Hunt · Post by **Andy Hunt** » 30 Jan 2010, 20:19

Yes, I reckon that it becomes generally unaffordable at about $150 a barrel.

Totally_Baffled · Post by **Totally_Baffled** » 30 Jan 2010, 20:19

Agreed.

If demand destruction kicked in at $147, why wouldnt it again when it rises to this level in say in a years time?

I think i read somewhere that car ownership in the US has peaked and is declining along with miles per driver.

2009 was also the biggest % drop in air travel ever.

Looks like we are already on the slope to prioritising what industries get the oil?

Vortex · Post by **Vortex** » 30 Jan 2010, 20:39

I agree that say $150 or so will reduce demand ... as Step One.

However it seems that only 20% of demand is 'frothy' ... cutting more than 20% will be much more painful, so people will/must pay more to keep their jobs etc.

I suspect that the 'hard' limit will be nearer $300 - $500.

snow hope · Post by **snow hope** » 30 Jan 2010, 21:37

I agree that around $300 - $500 will be the real limit for the majority of people. Thereafter, real pain will be caused and people will decide to give up employment. This price will come unfortunately. I know some people who think the price will never reach the $200 mark - I think they are going to be very surprised. Most people seem to under-estimate the value, use, utility, embedded energy that exists in a few litres of oil...... including me no doubt.

Vortex · Post by **Vortex** » 30 Jan 2010, 21:51

As I mentioned a few days ago, a brief pause in my business park car park made me realise that almost EVERYTHING happening around me was oil powered.

snow hope · Post by **snow hope** » 30 Jan 2010, 22:18

Yes, agreed, to most people it is almost beyond comprehension.

Ho hum.

ziggy12345 · Post by **ziggy12345** » 30 Jan 2010, 23:02

As I have always said its not how many $ a barrel of oil is but how much oil a $ is worth.

Andy Hunt · Post by **Andy Hunt** » 30 Jan 2010, 23:16

ziggy12345 wrote:As I have always said its not how many $ a barrel of oil is but how much oil a $ is worth.

You EROEI worshipper you. RGR would not approve.

Post by **adam2** » 31 Jan 2010, 08:27

In western Europe at least, I believe that an oil price of hundreds of $ a barrel would still leave substantial demand.
A major market is road fuel, which is very heavily taxed. By reducing the tax, the retail price could remain at near the present level with much more expensive crude.
Whilst I would not support such tax cuts, I suspect that the pressure for such will become unstopable.

Ships use a lot of fuel, but it is only a small part of the cost of many goods. Oil at say four times todays price would result in more expensive imports, but not prohibitively expensive.

I would expect some demand destruction, but not that much until oil reaches $1,000 in todays money.
Mass market air travell is already declining, and wind powered electric heat is competitive with oil burning heating, but I suspect oil powered road and sea transport to be around for long while yet.

2 As and a B · Post by **2 As and a B** » 31 Jan 2010, 10:36

$1,000 in todays money

And there's the rub. Barring a complete collapse of currency in a deflationary black hole, the oil price will inevitably rise to $200, $300, $400 and beyond due to inflation. But will oil be more expensive (e.g. in Mars bar currency or gold) than it currently is, and if so, by how much?

I'm not an economist so this, IMVHO, is my best shot, based on trends...

The (relative) oil price will ratchet up in a series of rises and falls that mirror the economy's downward trend in a series of mini booms and big busts(!). I think it will happen this way because oil will become increasingly expensive to extract and so the embedded cost of oil in the production and distribution of goods will increase over time causing the prices of those goods to increase relative to personal income. That will force a clear distinction in spending between essentials (food, power, heating, transport, tax(!), water rates, etc.) and non-essentials (indulgences and luxuries), with a consequent loss of employment (and income) in the non-essential industries - and hence boom will turn to bust again.

Alternatives to oil in the form of different energy sources, chemicals, lifestyles and relationships will take over as they become developed and accepted. With luck this will happen smoothly and seamlessly, but there are likely to be at least some disconnects, or, at a not-unlikely extreme, a complete domino-effect breakdown of national and global socio-economic systems.

Strong, realistic, hard-decision-taking government will be required to see us through this. At such a time the likes of Brown will, no doubt, be to be found under the table in the kitchen 'looking for the top to the salt mill.'

Vortex · Post by **Vortex** » 31 Jan 2010, 10:38

In western Europe at least, I believe that an oil price of hundreds of $ a barrel would still leave substantial demand.
A major market is road fuel, which is very heavily taxed. By reducing the tax, the retail price could remain at near the present level with much more expensive crude.
Whilst I would not support such tax cuts, I suspect that the pressure for such will become unstoppable.

Interesting. So lets assume we can afford a retail price of fuel of say 3 x the current price, that would allow oil to be roughly 10 times more expensive than now, if tax was removed.

However ... a big however ... the US economy would have collapsed because they have little tax buffer and rely on motor travel.

It would be an odd world: life as normal in Europe, chaos in the US.

I can imagine a situation where the US becomes a major market for ultra fuel efficient vehicles, whilst we are still swanning around in SUVs!

madibe · Post by **madibe** » 01 Feb 2010, 01:47

Snow hope wrote:

I agree that around $300 - $500 will be the real limit for the majority of people. Thereafter, real pain will be caused and people will decide to give up employment.

And theres the real rub... so +1 SH.

It wont be a case of giving up employment though... it will be a case of not being able to afford to get there (semantics, I know) - additionally by that time food costs and most other expenses will mean that a car is just not affordable. At which point an awful lot of people cant meet their mortgage or council tax bills. But do you think there are enough balifs to go around? If 4/10 are defaulting on payments do you think they will be moving out onto the street in a hurry?

Interesting times indeed, and probably a whole new way of how things operate, perhaps.

emordnilap · Post by **emordnilap** » 01 Feb 2010, 10:25

Vortex wrote:However it seems that only 20% of demand is 'frothy' ... cutting more than 20% will be much more painful, so people will/must pay more to keep their jobs etc.

Agreed but I also see that there are a huge number of bodies that could walk to work/school. I mean, I see so many who drive less than three or four kilometres to work. I live 10 kilometres from work and cycle there and back, though I'd happily walk it if I could do a three day week instead of five.

Time was when most walked, cycled or bussed to work/school, so there's a heck of a lot of slack there.

PS_RalphW · Post by **PS_RalphW** » 01 Feb 2010, 10:56

The problem as always is the debt based economy. I would love it if the economy could contract smoothly as supply and demand forced the price up so that demand destruction in the form of lifestyle changes and efficiencies and alternative (preferably renewable and sustainable) energy sources gained ground.

I can see the government inflating away the current level of petrol taxation. They did that quietly through most of the last decade already, after the fuel tax protests. This will give us a buffer against rising petrol prices, but at the expense of lost tax income to the governments, so either taxes rise elsewhere, or public service spending falls, or the government defaults on its debt.

However, the bottom line is that exponential growth is going to have to stop, and a period of contraction necessary in economic terms as we build the new infrastructure and adapt lifestyles to the new realities. However, we are almost all in debt at the personal, corporate, national and governmental levels, and in a zero or negative growth economy that must lead to massive defaults, possibly with runaway deflation and /or government led hyper-inflation.

Economically, we are facing last man standing. The US and the UK are very weak. We are already seeing discretionary demand destruction in the US. China and to a lesser extent India are massively growing, even with $147 oil, because they still have very low discretionary oil use. They have been outbidding the OECD for oil, and will continue to do so until it all the discretionary use has been removed, and OECD lifestyle is closer to that of say, Brazil. (Brazil is largely self sufficient in oil, and will be for the next 20 years). After that, if the world hasn't moved on to an alternative energy model, are we really are in trouble.

Not that this brings in any of the other limits to growth...