Nearly everyone wants to know where oil and gasoline prices are headed, and nearly everyone has at least one opinion on the matter. (I myself have secretly harbored at least four or five opinions on this topic within the last two weeks.) While I’ve made no secret of my distaste for faux precise prognostications, I have to point out and agree with one in particular, as detailed with brutal clarity in the article Oil prices, gasoline costs to double: CIBC report (emphasis added):
Crude oil prices will soar to more than $200 (U.S.) per barrel over the next five year[s] – driving Canadian pump prices to $2.25 a litre and forcing a fundamental transformation in the North American economy, says Jeff Rubin, chief economist with CIBC World Markets Inc.
In a new report, Mr. Rubin forecast a continued run-up in crude prices, despite a slowing world economy and slumping petroleum demand in United States, the world’s leading oil consumer.
He said he expects crude prices – now trading at above $116 (U.S.) a barrel - to average $150 by 2010, and more than $200 by 2012. That would translate into pump prices of $7 (U.S.) per gallon in the United States, and $2.25 per litre in Canada, double the current levels.
“Whether we are already at the peak of world oil production remains to be seen, but it increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity,” the economist said.
World oil production has essentially stagnated at about 85-million barrels per day over the last two years, with growing demand met by increases in natural gas liquids, a fuel source that is used by the petrochemical industry but is of little use for transportation.
Mr. Rubin said he expects crude oil production to grow by about 1-million barrels per day over the next several years.
Meanwhile, growing demand in China, India, Russia and the Middle East will more than offset declines in the industrialized world.
The report is here (4 page, 200KB PDF)
As for what this will be like, let me point out a few things, for those of you who didn’t already injure yourself by ricocheting off the ceiling just now.
Why would I take this “extreme” prediction so seriously, even if it’s from an analyst I trust? Look at his reasoning: The growing demand from countries outside the US will keep the market tight, and there won’t be any significant new supply coming online.
The demand part of that formula is a new phenomenon. Typically, a US recession meant a dip in oil prices, no matter what. But seriously, dude, that is so twentieth century. Today it means that we have a less-than-robust economy at a time of rising oil prices, putting all the more pressure on oil consumers at all levels of the economy, from individuals to organizations to businesses to schools to government.
The supply part of Rubin’s reasoning you can argue about, but only in terms of semantics. If oil exporters have the additional production capacity, but they choose not to use it, as has become abundantly, redundantly clear in recent weeks is their new inclination, then it’s a classic example of a distinction without a difference. No more oil is no more oil, regardless of the underlying reason.
What part of that basic formula can you dispute? I can’t find a flaw in it, and trust me, I would love to tear it to shreds.
Will this scenario really result in $200 oil and $7 gasoline in the US in only four years? To be honest, I have no bloody idea, and we could well see a fairly significant price dip in the short run before things get excessively interesting again. A lot could happen between now and 2012, including things that could make the situation far worse, like a new war in the Persian Gulf region, or things that could ease the situation, like Americans getting serious about conservation and reducing our exposure to the inevitable, much higher oil prices.
I am sure of one thing: The longer many of us sit around and do nothing, the worse it will be for everyone, because unlike the “double your gasoline cost” experiment I suggested above, when it happens in real life we’ll be stuck with high and rising prices for far longer than two or three months.
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April 24th, 2008 at 10:45 pm
I’ve mentioned this sort of thing to several people. There are lots of complaints about rising fuel prices.
I tell them: “They’ll only keep rising. When the price of something you use rises so that it strains your budget, you must (a) increase your income or (b) reduce your consumption of that expensive thing. With a recession looming, increasing income might be hard. That leaves us with reducing consumption, which even in boom times is easier than getting raises anyway.
“So in the next few years you should look for a house which uses less energy, and change to a job, or change house so that it’s a walkable or bikable distance from work, or is somewhere along a public transport route.”
They get very upset when I say this, claiming that I’m some greenie hippie trying to force my lifestyle on them, that the world is not going to go Mad Max, and anyway any change at all is impossible.
Which is funny, because following what I suggested wouldn’t necessarily make you a greenie, you could still eat burgers every day, toss the styrofoam packet in the gutter, power your home with coal and leave the AC on all weekend while you’re away, and so on. And I never said anything about Mad Max.
But consumption is so much a way of life for them that suggesting it could in any way be reduced, well the only alternative is apocalypse - Mad Max. They’re horrified.
I wouldn’t be surprised if Aussie and US governments are offering fuel subsidies in the next few years to keep the price low.
I dunno, seems like a return to good old thrift should not really be thought of as being some kind of commie from Greenpeace, or whatever.
April 25th, 2008 at 7:03 pm
Thanks for bringing up that angle. It very closely matches my experience in talking to newbies about this topic.
The other thing I run into constantly is the implicit assumption that because I say “X will happen” that I want X to happen or think it will be a good thing in the long run, etc. I tell them that if I had my way, we’d have more fossil fuels than we can find ways to burn, and that the CO2 wouldn’t trigger global warming. But almost no one believes me–they think I have some sort of super secret agenda that involves controlling how they live.
April 26th, 2008 at 1:28 am
Well, I tell them my honest experience, which was:
(1) realise that fossil fuels and other mineral resources are finite
(2) in principle at least, most mineral resources could be 100% recycled, so their finiteness wouldn’t matter much; but fossil fuels get burned - they’re gone, smoke, and that’s that.
(3) therefore, one day in life we’ll have to do without burning stuff
(4) if some change is inevitable, we have to plan for it, and may as well start today, so it’s a slow comfortable change instead of forced on us
(5) so we need a plan for a world without burning stuff? What would that look like?
(6) actually, not so bad. Maybe better in a lot of ways.
But they just assume “it’s ideological, you just say that because you’re green-commie-liberal-stuff.” They assume that the beliefs came first, and the reasoning was beaten up to fit the beliefs later.
Perhaps because that’s the way they do it, I dunno.
April 27th, 2008 at 1:37 am
I think you were right to suggest that might be a interim price drop in the future. There is a large amount of speculative money in the commodities markets. But long term $7.00 per gallon could be pushed back if higher prices curb demand.
May 4th, 2008 at 8:08 am
Dumb question: If the price of oil increases to $200 per barrel, why will it only affect American consumers and not Chinese and Indian consumers? Supply vs. demand vs. price works everywhere, doesn’t it?
May 4th, 2008 at 8:31 am
davelc50: Not a dumb question at all. (And welcome to the site.)
The problem is that there are so many people in China and India that if only a relatively small portion of them consume oil at the per capita rate that all US citizens do (on average), then it still adds a huge, new increment to worldwide oil consumption. In other words, $200 (or higher) oil will definitely keep many of those new consumers from consuming in anywhere near the wasteful way Americans do now, but there will still be enough of them willing to pay the high price to put US consumers under pressure to consume a lot less.
I’m in no way passing judgment here about which group of consumer “should be allowed to use a lot of oil”, or anything similar, as I often see the conversation framed. I’m simply pointing out that the market dynamics very strongly favor a stunning rise in oil prices in just a few years, once we take into account the changes in China and India, plus those in some oil exporting countries, which are also seeing big demand in their domestic consumption.
May 5th, 2008 at 8:48 am
Americans have been over-consuming oil since at least the 70s. I would have thought we would have started preparing for peak oil back then. Now it’s going to hit us even harder.