[R-G] [BillTottenWeblog] The Peak Oil Crisis: Assessing $200 Oil

[Bill Totten]

by Tom Whipple

Falls Church News-Press (July 03 2008)


Three months ago anyone talking about $200 oil was considered a fear
monger, or worse, but things happen fast these days. In the intervening
period, oil prices have risen by nearly $40 a barrel and show no signs
of stopping. All of a sudden it has become fashionable to start talking
about much higher prices and to start thinking about the implications of
multi-hundred dollar oil.

Among the many debates going on over oil is one holding that crude will
never get much beyond $200 a barrel because at such an extreme price,
demand for oil products will drop so much that prices will fall back to
more affordable levels. Countering this argument are those who point out
that nearly half the world's population can buy oil products subsidized
by their governments or national oil companies, will never be subjected
to the high world prices and will go merrily along increasing their
consumption for a while longer. While demand for oil products in the US,
Europe and other OECD countries is starting to slip, this drop in
consumption is more than being made up in the subsidized societies of
Russia, the Middle East, India and China.

If oil prices move from $140 to $200 the impact is going to be felt more
harshly than during the climb from $20 to $140 that has taken place in
the last few years. To the surprise of many, oil consumption in the US
did not begin to drop noticeably until the price moved beyond $100 a
barrel and even then it is only in the last few months as gasoline
approached $4 a gallon that a significant drop in consumption was noted.

As oil approaches $200 a barrel, the impact will be distributed
unevenly, depending on one's circumstances, job, lifestyle, geographical
location and a host of other factors. It may be easy to say that
consumers will simply cut back on discretionary spending, but in the
US's "service economy", a large share of the jobs currently depend on
discretionary spending. As a larger share of disposable income goes for
the essentials of life - food, shelter, clothing, medical services and
of course transportation to places of employment - discretionary
spending on vacations, recreation, entertainment, eating out and "stuff"
is bound to fall sharply.

It is easy to conclude that the mix of essential/discretionary spending
will shift, but to quantify just how bad things will get is far more
difficult. The situation of course is muddled by the current financial
crisis that shows every sign of becoming much worse with each passing day.

Last week the Los Angeles Times ran a story entitled "Envisioning a
World of $200-a-Barrel Oil" {1} which was sort of a tour d'horizone of
all the bad things that are going to happen when oil reaches $200 a
barrel. The story was replete with quotes such as "You'd have massive
changes going on throughout the economy", and "Some activities are just
plain going to be shut down". Other quotes were apocalyptic "The
American people would be kicked in the teeth so darned hard by
$200-a-barrel oil that they won't have the ability to buy much of anything".

The authors recognize that nearly every aspect of our current lifestyles
will be affected from simply having a job to getting to work. Naturally,
costs of nearly everything made from oil will increase and even shipping
stuff from China will increase its costs by fifteen percent. Major
declines in the stock market will create havoc with pensions and
personal wealth. There will, however, be a few upsides to $200 oil such
as less traffic and more opportunity for local manufacturing and
agriculture.

It is well enough to point out that a myriad of problems will come with
$200 oil, but so far few have attempted to quantify just what might
happen in the next few years. One recent effort to assess $200 oil was
undertaken by Canada's CIBC bank. Starting with the well publicized
decline in auto sales, the bank concludes that US light vehicle (cars,
trucks, SUV, and vans) sales will be down to eleven million by 2012 from
seventeen million a few years ago. The share of SUVs and light trucks is
expected to be less that half that of their banner years. Increased
scrapping of light vehicles combined with lower sales leads the bank to
conclude that there will be roughly ten million fewer registered
vehicles on US roads by 2012.

While this may sound like an impressive number, Americans are currently
driving around 230 million light vehicles so ten million less is not too
significant. The more important question is how much the remaining
vehicles are going to be used. Here the bank foresees a fifteen percent
drop in the average miles driven by 2012. Presumably an increasing share
of these miles will be driven in newer, more efficient vehicles so that
that the drop in US gasoline consumption would be greater than fifteen
percent.

The CIBC study, which deals primarily with transportation, certainly
anticipates a relatively benign world in which we scrap our old cars,
don't buy SUVs and those households earning less than $25,000 a year and
have access to public transportation, take the bus. The people
interviewed by the Los Angeles Times seem to have a much darker view of
the immediate future.

There are simply too many unknowns out there to form a conclusion as to
just how bad it may get. The Bank's $200 oil in 2010 could easily prove
to be optimistic for some are talking about $200 before the year is out
even without a major supply disruption. Then we have the hurricane
season. And many are convinced that the Bush administration will not
leave office with an Iranian nuclear program still in place.

While some sort of quantitative evaluation of our future would be nice,
$200 oil easily could be here before anyone can crunch the numbers.

Link {1} "Envisioning a World of $200-a-Barrel Oil" by Martin Zimmerman,
Los Angeles Times (June 28 2008)
http://www.latimes.com/business/la-fi-oil28-2008jun28,0,5485259.story


http://www.fcnp.com/index.php?option=com_content&view=article&id=3249:the-peak-oil-crisis-assesing-200-oil&catid=17:national-commentary&Itemid=79


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