[trespam]

OK modelling folks. I've love to know what you think. Get out those slide rules, the PC, or the Cray 4. Polish up your economic models.

What will the price of oil be as we approach and pass peak. How high will it go. It will not become infinite. There will be a maximum price. And what will the approach be like?

We really need a model for this to better understand how this is going to play out. Qualitatively, oil is going to run-up, we'll see some capacity increases with investment, then depletion will start in for once and for all. At that time, we can expect oil prices to what? The economy is going to recess, demand destruction will take place, additional production will be available, then consumption will increase or further depletion will result in another run-up in prices.

So what's the maximum price? And how will it oscillate? Any good models we can use to consider this further?

[trespam]

One clarification: I should not have said additional production will be available after peak. I meant to say consumption will drop below production because of demand destruction. This should lower the price of oil at least a bit from whatever peak it has hit.

[stayathomedad]

trespam: i think that we do not need a Cray for that. First you go to the price adjustement, let's say whatever that when you convert 1970's dollar into 2004 dollar. A what, factor of at least four? And then put in the difference between, uhh, a pound of chuck steak compared to a filet mignon, there you have a start. So we go with a factor of 10 all together to start with. The rest, history will tell. In principle we are looking at least at one order of magnitude, and then we see what happens. It will not be astronomicaly high, but close to it.

Oszillations should occur until folks are out of the denial phase. And then there will be a new way of life.

[nznutter]

I expect oil to be priced in Gold eventually as the greenback loses its value and the Middle East gets sick of been given worthless greenbacks for its oil.

However, I'm willing to take a punt that the first major downturn in price will happen around the USD $180-220 mark.

[trespam]

$this->bbcode_second_pass_quote('nznutter', 'I') expect oil to be priced in Gold eventually as the greenback loses its value and the Middle East gets sick of been given worthless greenbacks for its oil.

However, I'm willing to take a punt that the first major downturn in price will happen around the USD $180-220 mark.

[johnmarkos]

Average price of gold in 1980: US$ ~500/oz.
Average price of oil in 1980: US$ ~30/barrel

barrels per ounce of gold in 1980: ~17

Current price of gold: US$ ~420/oz.
Current price of oil: US$ ~52/barrel

Current # barrels per ounce of gold: ~8

Food for thought. :)

[Concerned]

The ultimate price of oil depends on many things related to supply and demand.

Discounting disruption to supply the biggest impact is people willing to reduce consumption most notably car travel in western nations.

Some difficulties in the demand based model is that to save money requires re-tooling your vehicle i.e. purchasing a smaller one. The people most in need of doing this (the poor) are in the worst position to go out and buy a newer more fuel efficient car. The people most able to afford a new fuel efficient car can also more easily afford to pay higher gas prices.

If supply is disrupted due to further wars e.g. Iran or the overthrow of the house of Saudi then the price of oil could easily double IMO.

[nznutter]

It should be remembered that in the 70s even though the price of oil was almost twice that of now there was NOT demand destruction. Government policys meant fuel was rationed i.e. not left up to the market to set the price. This time around there wont be rationing instead the market will determine the price of oil. food for thought.... Still bullish it will go a lot higher than $100 USD...

[trespam]

$this->bbcode_second_pass_quote('nznutter', 'I')t should be remembered that in the 70s even though the price of oil was almost twice that of now there was NOT demand destruction. Government policys meant fuel was rationed i.e. not left up to the market to set the price. This time around there wont be rationing instead the market will determine the price of oil. food for thought.... Still bullish it will go a lot higher than $100 USD...

[trespam]

And the EIA is already reporting that some demand destruction will set in next year. Now this is destruction in demand growth, not in demand outright. But the EIA is saying that we are seeing an impact at $50. I'm betting that $80 would push the economy into a recession that would reduce consumption. Also, if you look at Stephen Roache's latest writings,he believes prices much higher than $50 will take the sales out of the economy and it will then fall back into recession. I believe this recession would impact the global economy and could very well reduce consumption. So I'm going to say we won't see prices over $80 before we see a recession that reduces consumption.

But you know what: I'm guessing!!!!

Also, since someone mentioned gold, here's an article that compares gold with oil: gold/oil ratio extremes

[lowem]

Ah. I see some of you read Adam Hamilton. Great articles. Nice charts

Let's say gold-oil stabilizes at the old 17 ratio, and some of the "gold-bugs" out there forecasting roughly $3000 for POG, which, divided by 17, makes about $176, which is close enough to Matt Simmons' $182 target.

From the 1-year WTIC charts, I get $193.60 as a target level, but that is a whopping SIX resistance levels to go. Folks, 6 resistance levels aren't a joking matter if prices manage to blast through all of them. Usually we get to see 1, 2, or at the most, 3 at a time. Perhaps next year.

So, yeah, $180-$200++ is quite "doable". Just hope it doesn't come "too soon". Anyone else get the feeling that things are moving a little "too quickly" already?

[Matrim]

$this->bbcode_second_pass_quote('', 'A')nyone else get the feeling that things are moving a little "too quickly" already?

[skiwi]

$this->bbcode_second_pass_quote('Matrim', '')$this->bbcode_second_pass_quote('', 'A')nyone else get the feeling that things are moving a little "too quickly" already?

[chris-h]

The price can go at least 5 times higher before some people stop bying.
So i would say 250 $

[pup55]

This can be approached from either of two directions, leaving aside, for the moment, the excellent point above on potential changes in the currency value:

a. Go back to the “black boxâ€

[trespam]

Pup: I think I'm following you, but I question using those GDP figures. Long before oil gets up to $600/barrel, the GDP figures will have come down (in real terms, not considering inflationary terms). Therefore I don't think the analysis works.

[pup55]

You might be right, of course, but I will stick to my estimate anyway. I will probably not be around to see if this is right or wrong. Maybe you will.

First of all, I am more thinking about the time period maybe 25 years post-peak. For a 2020 peak, maybe this will be 2045, during the "steep decline" part of the curve. In that situation, you can easily imagine a 7% economic decline year-over-year, and a 7% depletion rate, which would make the demand relative to the remaining reserves exactly the same, despite the economic contraction, hence the stable price. In fact, some of the more efficient countries, Italy maybe, might only experience a 3% economic contraction during the same period, and thus be "ahead" relative to the inefficient nations.

Also, you have to consider the behavior of the oil producers. Pre-peak, it is in the producers' interest to pump oil at the "optimum rate", fast enough so as to not cause an economic slowdown, but not so fast as to create a glut. The normal incentive for a producer would be to pump as much oil as they could, so as to maximize revenue, not "optimize" by showing restraint, hence the cartel OPEC was formed to provide the restraint. Post peak, however, the rules change completely. It's in the producer's interest to pump as little oil as possible, keep prices as high as possible for the current production, and leave as much in the ground as possible, because you know your customer will be around tomorrow anyway like the addict he is, especially if he needs oil to run his agriculture industry and keep his population from starving to death. Not only that, but you will need to extend your source of income as far into the future as possible.

Also, in the long term post-peak, past the plateau stage, the normal rules of economics that applied on the uphill do not apply either. The normal state is economic contraction. The only way to "win" and actually maintain stasis or get ahead would be to do everything you can to get more efficient with the limited amount of oil available. So maybe the "efficient" countries like Italy, who already have a head start, will get up to $3000 GDP per BOE and the $650 oil will be relatively cheap.

So maybe $650 is too low an estimate.

[chris-h]

How much money does the USA needs to invade all those countries except russia of course and set the price to what it wants ? selling oil to only the countries that they want to sell ?

Tell me i am wrong but i do not believe that the USA is going to give $650 per oil barrel to say venezuela or nigeria or iran .
It is going to be more like an operation freedom for all countries.

[trespam]

$this->bbcode_second_pass_quote('chris-h', 'H')ow much money does the USA needs to invade all those countries except russia of course and set the price to what it wants ? selling oil to only the countries that they want to sell ?

Tell me i am wrong but i do not believe that the USA is going to give $650 per oil barrel to say venezuela or nigeria or iran .
It is going to be more like an operation freedom for all countries.

[Permanently_Baffled]

Trespam is spot on , even the current US administration must realise that military action against oil producing countries REDUCES there oil supply it does not increase it!! (Iraq being the obvious example)

Even if the US did manage to keep the oil infrastructure in place , international economic retaliation would soon cripple the US anyway.

The best we can hope for is some sort of international oil quota system. This is where a forecast is made of the amount of oil that can be produced in any one year and then apportioned to each oil importer depending on a agreed oil use per capita. This is obviously going to be a painful and difficult process but I see no other option(assuming we dont blow the **** out of each other) This way a country can decide how it will manage its 'powerdown'.

What you think? wishful thinking ? ... probably....

PB