[MrBill]

Let us look at demand for fossil fuels versus growth in the real economy. Just for simplicity I will use some round numbers for crude oil consumption that we can assume gets turned into gasoline and heating or diesel. Anything else is too complicated for me this afternoon.

So in H1’06 the US economy grew about 4% of average using about +/- 2% more transport fuel as last year. That is a pretty good return on energy efficiency despite the USA also using petroleum for leisure as well as for manufacture and production. And despite higher interest rates and higher retail pump prices that should have curbed demand (they did but the saving came at the expense of potential demand being lower than actual demand).

In H1’06, China’s economy grew at approximately 10-11% while their imports of crude increased about +/- 16% (all nos. off the top of my head at the moment as it is Friday afternoon and I cannot be bothered to dig any deeper). I may be overstating China’s usage based on import numbers as they still do produce domestic petroleum for about 40% of their needs. Some of that gets re-exported as refined product. But still, this indicates to me that China is using more transport fuel per unit of GDP growth than the USA. Germany and Japan, the other two large, export-oriented economies along with China, would use less than the USA. Japan about two thirds while Germany uses about three quarters.

So back to your question. Obviously, a slowdown in the USA will mean less fuel is burned to create less economic activity. As transport fuel is very price inelastic that means a drop-off in demand can create a rather larger drop in price as the USA uses 25% of the world’s crude oil and burns 40% of its gasoline. Clearly, the USA matters when it comes to the price of gasoline and heating oil or diesel.

However, as Chindia and Asia are growing significantly faster than the USA or the rest of the developed world, and as they are less fuel efficient, any drop in demand from the USA is likely to be quickly absorbed by the rest of the world. Especially, if the price falls as this will be ease pressure on those states that subsidize the difference between the world price and the lower domestic price which artificially keeps demand higher. A lower world price would not directly increase demand in those countries, but it would ease budget deficits and free up more capital for re-investment into industry that uses more fuel.

As you correctly stated oil companies are finding it difficult to replace reserves (see Trader’s Corner). All major oil companies are struggling to replace production despite higher prices. Okay, part of that is because many of the world’s most promising oilfields are off limits to them, and many state oil companies are bled dry for government revenue, incompetent, corrupt or all three.

But as a drop in economic activity in the USA will not necessarily translate into a large drop in overall, global demand for petroleum products, and as oil companies are struggling to replace reserves, any subsequent pick-up in growth would be against a backdrop of not necessarily lower production, but certainly more expensive, harder to get at, and frustratingly, supplies that are off limits or under exploited due to incompetence and lack of investment.

For example, in Iran, Iraq, Libya and Venezuela, production has failed to rebound to pre-revolution, pre-whatever events, despite higher prices and better technology being available through specialist oil service companies. That is a trend we are likely to see in places like Chad, Sudan, Nigeria, Uganda and in Latam as state oil companies simply do not have the right expertise or they are starved of funds for re-investment.

Under this scenario there would be technically enough supply in the form of known reserves, just not enough coming to market, and through mismanagement some production lost forever. Again for example aging oilfields in Venezuela that were left abandoned after experienced PVDSA employees were sacked, and those fields cannot be rehabilitated now with known technology. Never mind that those international oil companies already burned by re-nationalization will be rue to re-invest into countries where they have had assets confiscated already. New partners may not have the same expertise. Like CNPC in Venezuela who are fine for simple, straight forward onshore oil recovery investments, but lack deepwater experience.

And as Venezuela is committing themselves to send up to 500% more oil to China at a loss of $3 a barrel due to extra transport costs, and as China is unable to refine that heavy, sour crude, those barrels are not available for the US market that does have the refineries to process that grade. Given that it will take China some 5-10 years to build the refining infrastructure to handle those heavy, sour grades. Meanwhile, the USA will have to also import from farther away. Therefore you have deliberate economic loss from political considerations over commercial decisions. That means that both Venezuela and the USA will be worse off. Venezuela will have less revenue to re-invest in exploration and production, while the USA will spend more to import from farther away. China is only better off if they get the Venezuelan crude cheap enough that it is worth storing or re-selling on the open market (most likely in my opinion).

In summary, we are all screwed as usual. Have a nice weekend.

[Doly]

$this->bbcode_second_pass_quote('MrBill', '
')For example, in Iran, Iraq, Libya and Venezuela, production has failed to rebound to pre-revolution, pre-whatever events, despite higher prices and better technology being available through specialist oil service companies. That is a trend we are likely to see in places like Chad, Sudan, Nigeria, Uganda and in Latam as state oil companies simply do not have the right expertise or they are starved of funds for re-investment.

[MrBill]

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', '
')For example, in Iran, Iraq, Libya and Venezuela, production has failed to rebound to pre-revolution, pre-whatever events, despite higher prices and better technology being available through specialist oil service companies. That is a trend we are likely to see in places like Chad, Sudan, Nigeria, Uganda and in Latam as state oil companies simply do not have the right expertise or they are starved of funds for re-investment.

[MrBill]

$this->bbcode_second_pass_quote('', 'V')enezuela, China Sign $11 Billion Oil, Transport Agreements

Aug. 24 (Bloomberg) -- Venezuela, the world's fifth-largest oil exporter, has signed at least eight accords with China, including agreements on energy and banking, as it seeks to lessen its dependence on the U.S., President Hugo Chavez said. China will invest $9 billion to help Venezuela build a railway line and $2 billion on the country's oil industry, Chavez, who is on a five-day official visit to the world's fourth-largest economy, said in Beijing today.

The country will double fuel sales to China next year to 300,000 barrels a day and more than triple them within five years to half a million barrels a day, he said earlier today in an interview with Venezuelan state television. ``We are going to reach 500,000 barrels within five years,'' Chavez said, up from 150,000 barrels a day now. China imported just 14,000 barrels a day from Venezuela in 2004.

Chavez has sought to lessen Venezuela's dependence on the U.S., which buys about two-thirds of the country's daily exports of 2 million barrels. Chavez, who took office in 1999, has repeatedly threatened to cut off sales to the U.S., alleging its government has attempted to assassinate or overthrow him. Chavez's visit is an attempt by China to tell the U.S. that it has influence in South America and that it supports Venezuela's efforts to move away from the U.S., said James Brock, a Beijing-based independent energy adviser for major foreign oil companies. Cooperation The visit will ``push forward the development of our bilateral relations'' and promote cooperation on ``all aspects'' China's President Hu Jintao said at a welcoming ceremony.

State oil company Petroleos de Venezuela has signed an agreement with China National Petroleum Corp., the parent of China's largest oil company, to form a joint venture to manage and produce oil from the fields in the Zumano region and the Orenoco Oil Belt, Chavez said. No further details were available. Zumano has proven reserves of about 400 million barrels of light oil and 4 trillion cubic feet of natural gas. Petroleos de Venezuela will hold a majority stake in the enterprise.

The Zumano fields are currently producing about 25,000 barrels a day. The two companies will also form a joint venture to certify reserves in the Junin 4 tract, one of Venezuela's heavy oil blocks. Venezuela is seeking to certify reserves in 27 blocks, which Chavez says may hold up to 235 billion barrels of oil. ``China would want to keep their options open on securing supply,'' Gavin Thompson, country manager for China at energy consultant, Wood MacKenzie Ltd., in Beijing said. ``Venezuela would like to see lots more Chinese investment for onshore, and the Chinese have experience in that area, in enhanced oil recovery from older, life-long fields, as long as the environment isn't very challenging like in deepwater. That's very good for Venezuela.''

Tankers and Rigs Chavez also plans to sign contracts for 18 oil tankers worth $1.3 billion, and 24 oil drilling rigs. Part of the rigs would be constructed in Venezuela, he said. The country has previously pledged to boost oil sales to China, the world's second-largest importer, with mixed success. Oil Minister Rafael Ramirez said in January that oil sales to China would top 300,000 barrels a day by the end of this year. Venezuela's efforts to boost sales to China have been hurt by its type of crude oil, which is heavy in metals and sulfur. China's refineries aren't equipped to process the oil. ``China won't be able to process Venezuelan crude for five to 10 years,'' said Roger Tissot, an analyst with PFC Energy in Washington, D.C. Far Away Long distances are another factor, Tissot said. Venezuela can send oil to the U.S. Gulf coast in four to five days, while shipment to China can take as long as 40 days. Transportation costs also are higher, and Venezuela is probably losing as much as $3 a barrel by paying for the crude to be shipped to China, according to oil analysts. ``Most of the oil and Orimulsion is very heavy and you don't really want to be shipping them over, through large distances,'' said Wood MacKenzie's Thompson. ``There're some very clear economic reasons why they (the Chinese) are not as bullish about Venezuela as perhaps they might be.'' Orimulsion is a Venezuelan brand of alternate boiler fuel made of water and bitumen.

Venezuela last month ranked fourth in production from the Organization of Petroleum Exporting Countries, behind Saudi Arabia, Iran and the United Arab Emirates. The Latin American nation has failed to meet OPEC's output target since September 2002. As Chavez has sought new markets for his country's crude, oil sales to the U.S. have fallen. Venezuelan oil and petroleum product sales to the U.S. fell 6.3 percent for the first five months, according to the U.S. Energy Department. Still, Venezuela is one of the top four suppliers of crude oil and fuel to the U.S., according to Energy Department figures. In some months the country sends more to the U.S. than Saudi Arabia.

[thuja]

Ok but Mr. Bill you are saying that if America is hit by a very hard recession, and therefore experiences subsequent demand destruction, thereby lowering the cost of oil, that Chindia will pick up the slack by buying any excess production.

But what of we experience a worldwide Depression? If America goes down due to x,y and Z, won't we take the rest of the world with us since we are one of the major importing nations? And if there is a worldwide Depression, then there should be worldwide demand destruction, thus slowing the oil consumption rate and leaving a great deal of oil out there to be exploited once the world begins to economically rebuild.

My suggestion is that we may hit an economic meltdown before we reach geologic limits. In that case, we may actually return to a state of economic growth after the Depression...possible?

[zoidberg]

$this->bbcode_second_pass_quote('thuja', 'O')k but Mr. Bill you are saying that if America is hit by a very hard recession, and therefore experiences subsequent demand destruction, thereby lowering the cost of oil, that Chindia will pick up the slack by buying any excess production.

But what of we experience a worldwide Depression? If America goes down due to x,y and Z, won't we take the rest of the world with us since we are one of the major importing nations? And if there is a worldwide Depression, then there should be worldwide demand destruction, thus slowing the oil consumption rate and leaving a great deal of oil out there to be exploited once the world begins to economically rebuild.

My suggestion is that we may hit an economic meltdown before we reach geologic limits. In that case, we may actually return to a state of economic growth after the Depression...possible?

[MrBill]

$this->bbcode_second_pass_quote('thuja', 'O')k but Mr. Bill you are saying that if America is hit by a very hard recession, and therefore experiences subsequent demand destruction, thereby lowering the cost of oil, that Chindia will pick up the slack by buying any excess production.

But what of we experience a worldwide Depression? If America goes down due to x,y and Z, won't we take the rest of the world with us since we are one of the major importing nations? And if there is a worldwide Depression, then there should be worldwide demand destruction, thus slowing the oil consumption rate and leaving a great deal of oil out there to be exploited once the world begins to economically rebuild.

My suggestion is that we may hit an economic meltdown before we reach geologic limits. In that case, we may actually return to a state of economic growth after the Depression...possible?

[thuja]

It seems like there are four main possibilities after the peaking of geological capacity.

One is that there will be economic decline somewhat commensurate with the decline in oil production. This essentially means a never ending worldwide Depression (Kunstler scenario- The Long Emergency)

Two is that efficiency and conservation measures will make slow or perhaps not induce economic decline for some time. We will be able to transition to a low energy world with only mild recessions.

Three is that a Recession/Depression will induce demand destruction in some areas but that slack will be taken up by other countries. This will cause economic decline unequally. (Bill's scenario- America flames out but Chindia rises.)

Four is that a Depression will cause massive worldwide demand destruction. There will be a series of boom/busts with ever less oil to play with each cycle. (The Zoidberg scenario.)

[Tyler_JC]

I have a hard time understanding scenario three.

It seems like a 5% reduction in US oil consumption would have to translate into a massive increase in oil consumption in China, right?

With today's global economy, it's hard to imagine an export-driven economy like China growing in the face of falling demand for its export products.

The redistribution scenario will only work if some nation or group of nations can pick up the slack of the American consumer or if the export-driven economies can figure out a way to dramatically stimulate domestic demand.

It's certainly possible, but it doesn't seem likely in the short term.

The redistribution scenario requires significantly leadtime and in an age of violent price swings and economic turmoil, might take even longer.

But I agree with the first poster. A recession starting next year would stop the demand growth for oil and thus production would level off or maybe drop. When the economy started growing again, production might be unable to match the new demand and prices would hit the triple digits before the recession resumed.

[mmasters]

$this->bbcode_second_pass_quote('thuja', 'I')t seems like there are four main possibilities after the peaking of geological capacity.

One is that there will be economic decline somewhat commensurate with the decline in oil production. This essentially means a never ending worldwide Depression (Kunstler scenario- The Long Emergency)

Two is that efficiency and conservation measures will make slow or perhaps not induce economic decline for some time. We will be able to transition to a low energy world with only mild recessions.

Three is that a Recession/Depression will induce demand destruction in some areas but that slack will be taken up by other countries. This will cause economic decline unequally. (Bill's scenario- America flames out but Chindia rises.)

Four is that a Depression will cause massive worldwide demand destruction. There will be a series of boom/busts with ever less oil to play with each cycle. (The Zoidberg scenario.)

[MrBill]

$this->bbcode_second_pass_quote('Tyler_JC', 'I') have a hard time understanding scenario three.

It seems like a 5% reduction in US oil consumption would have to translate into a massive increase in oil consumption in China, right?

With today's global economy, it's hard to imagine an export-driven economy like China growing in the face of falling demand for its export products.

The redistribution scenario will only work if some nation or group of nations can pick up the slack of the American consumer or if the export-driven economies can figure out a way to dramatically stimulate domestic demand.

It's certainly possible, but it doesn't seem likely in the short term.

The redistribution scenario requires significantly leadtime and in an age of violent price swings and economic turmoil, might take even longer.

But I agree with the first poster. A recession starting next year would stop the demand growth for oil and thus production would level off or maybe drop. When the economy started growing again, production might be unable to match the new demand and prices would hit the triple digits before the recession resumed.

[nero]

Just to be clear at the start, I am referring only to a recession as commonly defined as a decrease in the real GDP (after inflation) for two or more quarters. I am also limiting my assertion to the near term aspects of the peaking of oil production. The long term consequences are quite another matter which I would expect to be dominated by the geopolitical consequences of energy insecurity.

As the EROEI for oil declines it is leading to an investment boom in technologies that mitigate the effects of the decline in energy availability. As peak oil occurs the EROEI will be declining quite rapidly and we will make huge investments in alternative energy sources, in transforming our transportation system, in our homeland security and in renewing our local manufacturing capability.

This investment boom of course will have a cost, we will have to have higher prices for energy and transportation, higher prices for things that we currently get very cheaply from china, and higher taxes to pay for the increased costs of security.

We will have booming GDP numbers due to all these investments but people will not feel wealthier because prices and taxes will have to increase to pay for those investments. These increases in prices are not simply inflation, in fact, official inflation might remain tame because they will adjust the inflation numbers to account for the "improvements" we are receiving. For example if we change our buying habits from gas powered to hybrid cars, there will be no difference in the utility of your car yet the government statistics will consider the hybrid a "better" car and thus adjust the inflation figures down to take into account that we are all now buying "more car".

You can't blame the statisticians for this, it is just the way it works. Another example would be the cost of offshore oil rigs. 40 years ago, we were finding alot of oil in shallow waters and at shallow depths so the rigs were not very complicated and not terribly expensive by todays standards. Now we have to drill miles down under thousands of feet of water to find the same amount of oil per rig. How does the stastician who is trying to calculate the producer price index account for the fact that the capabilities of offshore oilrigs have increased so dramatically yet the amount of oil they find hasn't? Economists commonly consider inflation to be inaccurate because the economy is littered with these sorts of conumdrums. As we are forced to rapidly transform our economy due to peak oil this statistical problem will only grow.

The result will be that the GDP numbers will fail to notice peak oil yet we will all start to feel much poorer. There will be a disconnect between how people feel about their personal economic welfare and what the government sees when they collect taxes.



On Hedonic Adjustments (pdf)

[EnergyHog]

$this->bbcode_second_pass_quote('nero', '
')The result will be that the GDP numbers will fail to notice peak oil yet we will all start to feel much poorer. There will be a disconnect between how people feel about their personal economic welfare and what the government sees when they collect taxes.

[Kingcoal]

70% of oil goes into transportation. What is needed is a technological breakthrough in that sector. Most other hydrocarbon uses are benign.

[NEOPO]

as to the title - correct as peak oil equals a shrinking economy which is depression not recession.

Near term like 2007 maybe?
PO might not be noticed amungst the many other causes yet sustained $60 Oil has to have some impact eventually.
Things take time to filter out through the system ...inertia and all that...
It will never be said that Peak Oil caused the recession of 07' but could it be the cause...I think so.

[AirlinePilot]

$this->bbcode_second_pass_quote('nero', 'A')s the EROEI for oil declines it is leading to an investment boom in technologies that mitigate the effects of the decline in energy availability. As peak oil occurs the EROEI will be declining quite rapidly and we will make huge investments in alternative energy sources, in transforming our transportation system, in our homeland security and in renewing our local manufacturing capability.

This investment boom of course will have a cost, we will have to have higher prices for energy and transportation, higher prices for things that we currently get very cheaply from china, and higher taxes to pay for the increased costs of security.

[Euric]

$this->bbcode_second_pass_quote('Kingcoal', '7')0% of oil goes into transportation. What is needed is a technological breakthrough in that sector. Most other hydrocarbon uses are benign.

[nero]

$this->bbcode_second_pass_quote('Airlinepilot', 'Y')our going to have to expand on that part I quoted above. While I could buy the part about investing in alternatives, please show me how it is actually going to work. I think a lot of folks have made a very succint and clear argument that alternatives will do nothing but solve local issues on very small scales and result in giant piles of money being spent for little gain in the effort to retain our current way of thinking about this problem.

[mmasters]

$this->bbcode_second_pass_quote('Euric', '')$this->bbcode_second_pass_quote('Kingcoal', '7')0% of oil goes into transportation. What is needed is a technological breakthrough in that sector. Most other hydrocarbon uses are benign.

[AirlinePilot]

Ok, I can understand what your saying. I guess it all boils down to how you think these next few years are going to go down. How fast does it become a market problem(volatility) and how soon does it start noticeably affecting economic activity.

I am most decidely more pessimistic than you due to the time issue. I think what your saying basically is going to transpire, but there will only be a very short respite for GDP until those mitigating technologies show their true colors. I don't think it will take very long to see that throwing money and technology at the problem is not going to work. It already appears to me that we are pedalling very hard just to stay in one place and unless there is some fairly miraculous breakthrough very soon, the trend shows no sign of abating. It may in fact accelerate. At that point the real fun will begin. That is solely my opinion based on a lot of the already informative threads concerning alternatives on this site.

I see the crux of the issue as one of time and scale. Since we have obviously not done anything yet, the farther and farther along the decline curve we get, the uglier the downward slope looks.

I still think this is not something which will happen relatively soon, but it is going to come up on our radar screens within 3-5 years. It's defintely soon enough to scare the bejeezus out of me.