Oil touches US $70/bbl

It seems like a very strange deja vu.  It wasn’t that long ago that we were witnessing a steep and steady increase in the price of oil. I don’t think that today’s price – US$71.89/bbl has any longevity. Whether up or down, it will keep moving, as I predicted last October:

If I get out my crystal ball, I would forecast oil to bounce around in the $60 -$100 range until the financial crisis settles down, as the marginal cost of a new barrel of production is currently between $70 – $90 per barrel. Once the global economy is perceived to be back onto it´s exponential growth path, prices will spike once again before dropping back to the marginal barrel range as the growth bubble is burst once again by high oil prices. Each time this happens, the marginal barrel priced will ratchet up, taking the overall average price up with it. In short, I predict a wild roller coaster ride.

Bank on one thing – volatility.

I think we’re witnessing just such a movement. The current steady rise reflects the perception that we are on the road to economic recovery. (We may actually be on that road, but it is the perception that I think is important)

As usual I have to take the cheap shot and point out that oil is already dearer than the Budget Economic and Fiscal Update two weeks ago said it would be over the next five years!

Now that we’re in that marginal-price-of-new-oil price range, I have to ask. Is this the sign of a real recovery, where new oil does have to come into production to support a return to economic growth? Is this simply the perception of an economic recovery, which for all intents and purposes has the same effect on prices, but is ephemeral? Or finally, is the 9.1% decline rate of existing fields, as predicted by the International Energy Agency (IEA), forcing the market into the new oil production just to keep supplies steady?

My guess is that today’s price results from a combination of the second two. The economic news out in the world is not that rosy, despite all the money being printed in the name of stimulus. The massive production decline rates continue whether we are in recession or not.

41 thoughts on “Oil touches US $70/bbl

  1. “I agree about electric buses, and I think all new buses should be either fully electric of at least hybrids. Changing the engines of existing buses to either full electric or hybrid would be a great way to generate a lot of jobs for local companies like Designline.

    I note that we actually build buses in NZ, unlike cars.”

    We even export our bus designs:
    Clean And Green DesignLine Hybrid Bus Rolls Into Service In Baltimore
    http://www.capstoneturbine.com/news/story.asp?id=513

  2. Many criticisms of rail transit investment are based on inaccurate or incomplete analysis. For example, transit critics often cite operating costs. This overlooks the significant returns that rail transit offers. In 2002, for example, rail transit required about $12.5 billion annually in public subsidy. However, these costs were offset several times over by $19.4 billion in congestion costs savings, $8.0 billion in roadway cost savings, $12.1 billion in parking cost savings, $22.6 billion in consumer cost saving, and $5.6 billion in reduced crash damages.

    This APTA study is somewhat skewed by the savings accrued in the seven “big rail” cities, NY, Chicago, Philadelphia, Boston, SF, Baltimore, Washington. The study includes a further 17 cities where rail is a small part of the transit mix. The source spreadsheet and graphs allows the following breakdown of those cost savings.

    Population: NY 18m, big six 45m, small 17 46.5m
    Congestion: New York $8bn, big 6 $7bn, small 17 $7.2bn
    Roadway & parking: big 7 14bn, small 17 $6bn
    Consumer cost saving: NY $6bn, big six $9bn, small 17 $7.6bn

    Clearly NY, the US king of subways and skyscrapers dominates the congestion savings because of both those factors, the being two and half times better per capita than the other commuter rail cities.

    The savings for roadways and parking could easily be the result of density impacts on land values and construction costs.

    NY has dramaticly higher consumer cost savings per capita despite only having moderately lower car ownership rates. However NY’s average commute distances by all modes are much lower than any of the other big 6 or small 17, suggesting that a much higher proportion of NY’s land use has been dictated or facilitated by it’s historic commuter rail developments prior to the Model T.

  3. Some would argue everything should be priced in gold.

    A double decker rail transport system is a bit of a pipe dream. They have these in France, and they are everything BP says public transport isn’t: clean, safe and reliable, and run exactly as the timetable says they should. They are fabulous to travel on, he says, with first hand experience. I’d love my daily commute to be on one of those.

    But… they rely on shifting large volumes of people from point A to point B, and NZ isn’t built that way, not even in its bigger cities.

  4. If you want to know how oil supply effects price, then you need to price it in gold.

    The price of oil, based on demand/supply, in the last ten years, has been flat.

  5. nz has been paying artificial ‘we’re running out’ prices for 45 years – and the end (of oil supply) is not in sight yet.
    Oil was artificially raised so certain Companies could take full advantage of the burgeoning chinese market – just a little bit too greedy, and the rest was a house of cards.
    Good incentive for NZ to research electric travel/frieght – should have had NZ made alternative fuel cars on the international market for the last ten years imho.

  6. “What role do people on here think that high oil prices had in causing the recession?”

    They may have been the straw that broke the camel’s back but have a look at how different the recession timing has been for our three most populous regions. Using heavy vehicle State Highway vkt as a proxy for economic activity, we see that Auckland has had reduced heavy vehicle activity for the last 18 months, Wellington for nine months, Canterbury for three months. That suggests that high fuel prices and the mortgage squeeze were masked by other factors in some regions.

    On a site that BJ linked to about California’s financial woes there was a post analysing the impact of droughts on soy production. Almost one-third of the world’s soy and grain cropping lands are in areas declared “in drought” by various national governments. That could easily make last year’s food price rises look mild and kill any early recovery.

  7. In NZ you need to price oil in NZD, you need to do the currency conversion from USD to NZD using the spot rate, if you look at a graph of oil vs USD it may not be very meaning full to you. Especially if you are drawing conclusions that the price of oil is rising because the supply is declining, in the current case the oil is rising because the USD is falling. In case you guys in NZ hadn’t noticed the US is currently trying to destroy its dollar.

  8. I think it’s equally likely that we’ll see oil prices go down over the next few months as go up. It’s completely dependent on how the global economy “recovery” happens.

    What role do people on here think that high oil prices had in causing the recession? I know there were problematic fundamentals like the sub-prime crisis but it definitely seems like high oil prices were the straw that broke the camel’s back. Last year we had high inflation (leading to high interest rates) high food prices (caused by switches to biofuels and high transport costs) and high transport costs (caused by high oil prices). People could not sustain it and the system snapped.

    Given that, what are the chances that once we have a recovery and oil prices spike again, we’ll be thrown back into another recession?

    Can we break this cycle in any other way than reducing our oil dependency?

  9. I think frog is a bit too quick in declaring an accurate forecast last October, simply because the price is now in the forecast range. The price actually “bounced around” 35 to 45 dollars for quite a few months but has broken out of that range in a fairly steady climb to $70, with a few small backward steps. It certainly hasn’t been bouncing around in frog’s forecast range.

    At the moment, the price looks too high, since consumption has been lagging production for a few months (according to the US’s IEA). I suspect speculation this time. But, long term, frog is right in pointing out the ridiculous statements on oil prices in the Economic and Fiscal Update. If the hoped for economic recovery comes, oil prices will take off again, as production was at a plateau before the recession and, partly because of the recession, is unlikely to ever rise above that level again. [In fact, the Update reminds me of an analysis that Alan Bollard presented a couple of years ago when he forecast oil prices in the $35 range, I think, rather than the then price nearing $70; when asked for his logic, he said that since the price had been high for a while, it seems reasonable that it would come down. Amazing comment.]

    big bro takes a rather odd line. He’s almost saying that oil prices should be low and that widely available personal transport is a certain to be available for the foreseeable future. Whilst high oil prices may currently be caused by speculation, longer term high prices will be caused by a peaking and decline of world oil production. Public transport is the only viable solution for more than local commuting in a sensible time frame. We should concentrate on improving public transport in all cities and towns, and between towns, rather than on roads.

  10. However my point is that this won’t reduce the amount of peak period congestion on the current motorways and roads because as soon as you free up space some drivers will change their routes or travel times to take advantage of that space, not to mention the removal of the incentive to minimise trips that is presented by saturated roads.

    That’s why I generally don’t use the argument that public transport investment will REDUCE congestion. What it will do is give people more options for their travel, increases our resilience to oil shocks, reduces transport-generated CO2 emissions and potentially give people faster options. You invest in public transport for the benefit of those using public transport, not primarily for the benefit of those left on the roads.

    One of the clearest examples of this is the 12% increase in traffic within the London congestion cordon in the five years since the cordon was introduced despite there being no increase in traffic crossing the cordon. It seems that removing ‘foreign’ traffic has uncorked suppressed demand for local car trips within the cordon. Further proof that the entire road and parking system needs to be covered by a congestion toll.

    Hence the reason why I’m more of a fan of simply taxing petrol more to discourage car use. There’s no way to avoid it, it’s simple and cheap to implement and so forth. The only way to track movement within the zone would be through GPS tracking – which would be pretty “big brother” and incredibly expensive to operate.

    I’m pretty sure there have still been significant benefits of the Congestion charge in London though.

  11. Some of the increase in oil in the last while seems to be due to the weakening of the US dollar – but generally that end up being cost-neutral for us. In the end it’s not really the actual price of oil that is important here (does anyone actually know how many litres are in a barrel?) but how that price is changing.

  12. Jarbury. I take your point that if we can afford to invest in enough rolling stock a double tracked commuter rail can carry as many people as a 12 lane freeway clogged with SOVs.

    However my point is that this won’t reduce the amount of peak period congestion on the current motorways and roads because as soon as you free up space some drivers will change their routes or travel times to take advantage of that space, not to mention the removal of the incentive to minimise trips that is presented by saturated roads.

    One of the clearest examples of this is the 12% increase in traffic within the London congestion cordon in the five years since the cordon was introduced despite there being no increase in traffic crossing the cordon. It seems that removing ‘foreign’ traffic has uncorked suppressed demand for local car trips within the cordon. Further proof that the entire road and parking system needs to be covered by a congestion toll.

  13. Jarbury

    If it is NZ $ we have to use to buy oil, then by all means let us use NZ $

    The fact that our money lacks something of stability is not entirely our doing, though we could certainly do a lot better.

    BP had a point in recommending Gold… the relationship is more stable but we don’t buy oil with Gold either… and the price of Gold can vary with speculative purchases too.

    The effect on OUR economy however, is measurable in our dollars and nobody else’s.

    respectfully
    BJ

  14. but it is certainly not ‘pointless’ to detail the idiotic/delusional ramblings of the morons that work at treasury..

    does anyone else remember their (pre-election) ‘prediction’..

    ..that the recession would be over in the new year ’09..?

    ..and that they were $11.5 billion ‘out’..in just six months..(!)

    ..such incompetence is eye-watering..

    ..and yet key/national are basing their delusional plans..

    ..on the delusional predictions from these treasury economic-illiterates…

    ..whoar..!

    idiots to the left of me…morons to the right..

    phil(whoar.co.nz)

  15. BP

    The correct measure for NZ economy is Oil price in NZ $ (which is not much different in terms of looking for bubbles so I am not really disagreeing).

    respectfully
    BJ

  16. Frog –
    Jeanette’s been pointing out the failibility of MED’s projections of ‘oil price drops’ for a good while now – a mindset that insists that the price/demand paradigm will lead to falls in price, of a commodity which is getting scarcer & being stockpiled by those who have good data on it’s actual scarcity, is a totally failed paradigm.

    That our budget is developed by people who are invested in that paradigm is going to be a cause for concern, continually.

    So don’t apologise, take as many cheap shots at them as it takes for them to own up that they’re pulling the wool to achieve their own nefarious economic goals …
    ;-)

  17. Kevyn, I tried to put the link in my original post but must have messed up the HTML (serves me right for trying to link from a word rather than just posting the blog address). Just to look at some points of your post:

    Congestion? Forget it, triple convergence will kick in just the same as if you add more lane capacity or introduce a congestion cordon.

    I guess the point is that heavy rail has enormous capacity, so it doesn’t really matter if you get triple-convergence if you have a double-track of heavy rail that can carry as many people as 12 lanes of motorway.

    Peak oil? Forget it, diesel buses are only marginally better than cars, and heavy and light rail can’t be built fast enough. Hence my hobby horse of converting the existing bus fleet to dual battery/trolley power. That’s the only way PT can come to the rescue in a timely (and affordable) manner.

    Hence the need to get the hell on with it. If we really tried we could have the CBD tunnel built in 5-6 years, rail to the airport in less than that and even a Howick/Botany railway line built within a decade. Sure, that might be a bit slow for the immediate effects of peak oil, but we’re going to be dealing with the effects of peak oil for decades and decades so even if we’re a bit slow on the uptake initially it’ll be worth it in the long run. I agree about electric buses, and I think all new buses should be either fully electric of at least hybrids. Changing the engines of existing buses to either full electric or hybrid would be a great way to generate a lot of jobs for local companies like Designline.

    I note that we actually build buses in NZ, unlike cars.

    BP: Oil definitely did get over-priced by the middle of last year. However, it’s interesting to see how quickly it has recovered ground in the past month or so, even though it’s plainly obvious we’re still in the middle of a recession.

  18. And what’s been happening to the US dollar, hmmm?

    If you compare the oil price to the gold price over the decades, it has barely moved. One commodity you can’t make more of vs another.

    That’s the way I predicted the speculative bubble…..

  19. Jarbury, I am both for and against increased public transport investment. It depends on which particular problem it is being advocated as a solution to.

    Congestion? Forget it, triple convergence will kick in just the same as if you add more lane capacity or introduce a congestion cordon.

    Peak oil? Forget it, diesel buses are only marginally better than cars, and heavy and light rail can’t be built fast enough. Hence my hobby horse of converting the existing bus fleet to dual battery/trolley power. That’s the only way PT can come to the rescue in a timely (and affordable) manner.

    Reducing GHGs? Ditto.

    Balance of payments? Ditto.

    Social equity? Yep, no arguments aginast that one.

    Urban air quality? Ditto.

    Rural transport? Cheaper to give every rural dweller a Smart ForTwo.

    As a tool for encouraging higher urban densities? Yep, no major arguments aginast that one.

    Hence my asking for a link to the study mentioned in the US Secretary of Transport’s blog. Even a link to the blog would be good.
    Actually I just found it myself
    http://fastlane.dot.gov/2009/06/public-transportation-delivers-public-benefits.html
    and the study is this one conducted by VPTI
    http://www.apta.com/research/info/online/rail_transit.cfm
    although my questions about how they got those numbers are conveniently answered all together in a summary of the report’s accounting principals included halfway through this background paper
    http://www.iges.or.jp/APEIS/RISPO/spo/pdf/bgp/4201_BGP_II1_MRT_BG.pdf

  20. How many American cities have “well-established rail system”? What exactly do they mean by well-established? If the cities with well-established rail systems are New York, Chicago and Boston then it’s hardly surprising that they produce those differences when compared with cities without well-established rail systems, such as LA, Detroit, Charlotte and Louisville, just to stick with state capitols. That’s not simply a comparison of effects of access to commuter rail but also a comparison of the land use patterns that dominate 19th century big cities and twentieth century big cities – ie, a legacy effect that will take many decades to replicate with new rail systems.

    I would really like to the see the study that came up with the last set of figures. Have they simply calculated the costs of all those rail transit trips becoming SOV car trips or have they apportioned rail transit trips to other modes in proportion to actual rail tranit riders ability to switch modes or take into account user survey responses to a “what would you do if there were no rail transit service?” question. Most importantly, have they factored in the economic costs of not having skyscraper CBD’s, with their agglomeration economics, in New York, Chicago and Boston. If they have taken that simplistic first option then most of these savings are probably twice what they should be. The exceptions are two biggest offsets.

    Congestion costs is actually the time wasted compared with travelling by car at the legal speed limit and thus requires an estimation of the travel time cost or saving for rail transit trips using that same “ideal” travel time basepoint.

    Consumer cost savings could mean anything but I suspect it means car operating and/or purchase costs. That assumes that there are no rail transit users who can’t afford to buy and run a car, they merely chose rail transit for it’s convenience.

    No mention of health cost savings. That should be somewhere between $5bn and $20bn when smog and obesity are included.

    In 2002, spending $12.4bn on rail transit subsidies wiped $56.6bn off the US GDP :evil:

  21. Toad, still love that Mr 84% joke.

    How much money does NZ spend a year on importing oil? How much on importing cars?

    Even the USA is starting to realise the value of public transport, with the US Secretary of Transport’s blog talking about the benefits. Some interesting points:

    In one study done in the San Antonio, each 1% of regional travel shifted from automobile to public transit increased regional income about $2.9 million, resulting in 226 additional regional jobs. Other economic benefits include increased productivity, employment, business activity, investment and redevelopment.

    and:

    Cities with well-established rail system, according to a study produced for APTA, have less traffic congestion, lower traffic death rates, lower consumer expenditures on transportation, significantly higher per capita transit ridership, lower average per capita vehicle mileage, and higher transit service cost recovery than otherwise comparable cities with less or no rail transit service.

    and to do away with a few nasty myths:

    Many criticisms of rail transit investment are based on inaccurate or incomplete analysis. For example, transit critics often cite operating costs. This overlooks the significant returns that rail transit offers. In 2002, for example, rail transit required about $12.5 billion annually in public subsidy. However, these costs were offset several times over by $19.4 billion in congestion costs savings, $8.0 billion in roadway cost savings, $12.1 billion in parking cost savings, $22.6 billion in consumer cost saving, and $5.6 billion in reduced crash damages.

    Developing public transportation increases choices, for drivers as well as riders. Developing public transportation makes sense.

    Dirty, dangerous and unreliable, BB have you been on a bus or train in the last 5 years?

  22. And Shunda, why give me crap for pointing out bro’s lies instead of serving it to him for lying?

  23. Ah, no reference, so it is another 5 points Valis.

    Anyway, bro, making the transport sector pay for its carbon emissions (whether by way of a carbon tax or an ETS) is not taxing people onto public transport. It is simply making the sector responsible for the emissions (arather than the general taxpayer) pay for them.

    I would have thought that as an advocate of user-pays, you would support that.

    It would, of course, have the effect of getting more people to use public transport, but only if the public transport exists and goes where people want to go when they want to go there – and is not dirty, dangeous or unreliable.

    Which is why the Greens want to invest in it. Unlike Mr Eightyfour Percent, who uses statistics that demonstrate a serious inadequacy in public transport to attempt to justify continuing that inadequacy.

  24. Nah, its just kicks. I’ll get bored at some point, though I wish paratanui would get bored of telling lies first.

  25. “I think counts as a new lie, so +5 points, now on +6 overall.”

    Give it up Valis, you sound like some grumpy old school master.

  26. Why is it that the Greens want to control the movement of people?

    If you force people onto dirty, dangerous, unreliable public transport then you control when and where they can go, why are they so keen to do this?

  27. $70/bbl and the only people happy about this are the Greens.

    I think counts as a new lie, so +5 points, now on +6 overall.

    What rubbish, the Greens have already said they will tax people onto public transport

    Reference paratanui? Or is is another 5 points?

  28. Here here jarbury. And who says I’m happy about it BB? As for PT – if you build it, they’ll come. Nobody needs to be forced into anything, and PT won’t serve for everybody. We’ll still need the roads. We just don’t need any more of them, particularly as oil prices rise.

  29. How about “why is our government pursuing transportation policies that only make us more auto-dependent and more susceptible to the pains of future high oil prices” BB?

  30. $70/bbl and the only people happy about this are the Greens.

    Who cares about the poor, who cares that people will struggle to pay their bills when petrol goes up in price, just as long as we can use this hardship as a way of forcing people onto public transport.

  31. Excellent to see somewhere pick up on rising oil prices!

    I think it’s still just as likely we’ll see prices slump back to $50 a barrel over the next 6 months as spike to $150 a barrel – as nobody really knows whether we really are on the path to economic recovery or whether the few signs of light are just a false hope.

    Of course, what happens if we really are on the path to economic recovery and we end up with a $150-200 a barrel price spike? Cue another recession would be my guess.

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