Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on May 23, 2012
Jeff Rubin: Whatever happened to $200 oil?
Four years ago, when I was still chief economist at CIBC World Markets, I forecast that global economic growth was on pace to send oil prices to $200 (U.S.) a barrel by 2012. In short, the argument was based on a supply-driven analysis that weighed the sources of future oil supply against the prices that would be needed to make the extraction and processing of that oil economically viable.
Since that call (which clearly hasn’t come to pass) received some attention at the time, it feels fitting to spend a few words discussing what happened to derail the projection. That particular analysis, unfortunately, didn’t adequately address the stifling impact that rising oil prices would have on economic growth. At the time, a constrained outlook for global production growth against a backdrop of runaway demand meant prices had nowhere to go but up. As subsequent events would dramatically demonstrate, though, triple-digit prices had a much more critical effect on demand than supply.
By the time oil reached $147 a barrel, the economic drag was more than sufficient to trigger a chain reaction of events—including spurring higher interest rates which pricked the U.S. sub-prime mortgage bubble—that ushered in the deepest global recession of the post-war era. Instead of marching towards $200 a barrel, oil prices abruptly reversed course and plunged all the way to $40 a barrel.
The return of low prices was taken, by some, as proof that oil will continue to be as cheap and abundant as ever. As a quick return to the triple-digit range for oil prices indicates, however, that’s clearly not the case. My call for $200 oil was designed to underscore the massive cost of supplying the world with more than 90 million barrels a day. Then, as now, I stand by the analysis. Pumping out ever more barrels will require ever-higher prices. Just look at what happened when oil prices plunged. In Alberta’s tar patch alone some $50-billion in spending was either cancelled or postponed. The story was much the same offshore Brazil and in Venezuela’s heavy oil belt, a pair of locales that will play a vital role in meeting the world’s future oil needs.
If a mea culpa is in order, its roots can be found in the decision to underplay the demand side of the equation. Oil prices plunged to $40 a barrel after economic growth collapsed, taking global oil demand along for the ride. And that same movie is about to play out again. Recessions are already rolling across Europe. Economic growth in North America is lackluster, at best. Meanwhile, the spectre of sovereign debt defaults in the euro zone continues to hang over global financial markets. Added up, it spells another sharp drop for oil prices not because fuel is abundant, but because once again the world can’t afford to stay out of a recession.
What happened to my forecast for $200 oil? Quite simply, the end of growth.
6 Comments on "Jeff Rubin: Whatever happened to $200 oil?"
BillT on Thu, 24th May 2012 3:16 am
2012 isn’t over…but, if it costs $80+ minimum (the current consensus) to get that oil to the refinery from it’s source underground, THAT is the bottom no matter what the economy. Oil will NOT drop much farther before it is shut off, bringing the price right back up to new highs. Be patient.
Plantagenet on Thu, 24th May 2012 3:30 am
Obama’s new sanctions on Iranian oil, designed to take ca. 2 million barrells a day of Iranian Oil off the market, are scheduled to go into effect in June—–that may well send the price of Brent Oil back up.
DC on Thu, 24th May 2012 3:44 am
If you look at the peak price of $147 dollars back in 2008, if that had continued, it would have only taken another 3-4 months at most to get to that $200.00. So he shouldnt feel too badly about the whole thing. It could well be, the economy killing price is less than $200.00, it seems that is the case atm. That being said, the cost of extracting all the sorta fuel is only going on way, up. It does not matter how many ‘new'(old) techs the oilcos come up with. None of the non-oil replacement techs have a postive learning curve. As the tar becomes scarcer to get at, cost will go up no matter how many subsidies or tech-shortcuts they come up with.
So yea, one way or the other, economy killers or not, Well see that $200bbl, its just a question of when really.
MikeK on Thu, 24th May 2012 6:09 am
It seems pretty clear that what’s happening right now is that the U.S. has pressured its oil producing dependents into throwing more oil than is currently needed onto the market. This is in an effort to assuage the fears of China and India about dropping Iranian oil. I really don’t think either country will see this increased production as sustainable, though.
In any case, whether these countries stop purchasing Iranian oil or not, all that extra oil will evaporate from the market by mid summer. If China and India don’t budge on their oil Iranian oil purchases, the U.S. will either have to make up excuses as to why they will exempt these countries (unlikely in the case of China), or the real purpose of the sanctions against Iran will be laid bare and a trade war will begin to escalate between the U.S. and China. If that happens, a lot more economic collapse could be in the offing, and oil prices might fall quite a lot more. Who would that hurt more, Iran who is under-producing or the U.S. dependents who are over-producing?
Indigoboy on Thu, 24th May 2012 8:41 am
Using the analogy of an engine, it could be that oil prices have gone into idling mode. As you no doubt know, an engine which is just ticking over or idling, has a ‘governor’, which keeps it in check, between stalling and accelerating.
Could it be that we are now in a ‘governor range’ of prices (for example $75 $135)? So lower than $75 and the margin oil can’t be produced economically. Greater than $135 and the world economy can no longer thrive.
Using the $75$135 range as an example, the killer blow to the world economy, will be when margin oil can’t be produced economically for around $135
KingM on Fri, 25th May 2012 12:04 pm
This is a myopic view that focuses only on the United States. Global economic growth keeps chugging along, with the exception of a mild global recession in 2009.
2006 – 5.1
2007 – 5.2
2008 – 3.0
2009 – (-.5)
2010 – 5.1
2011 – 4.3
2012 – 4.5