Is oil too expensive right now?

I know the idea of oil being too dear is not a normal question canvassed here on frogblog, but I am left scratching my head as to why the price is staying stubbornly high when the data suggest it should be drifting downwards. I’ve just read this month’s OilWatch Monthly, and it seems that Rembrandt Koppelaar is of the same mind, but for more rational reasons.

My logic was that the US economy’s stagnation and the jitters across the Euro zone about Greece’s near default and the plight of the PIGS would surely be keeping the oil market depressed. And it is.

Rembrandt points to high stocks and high spare capacity in oil producing countries as his reason for the price to be lower – but it is stubbornly staying in the $70 dollar range.

Adding fuel to my misgivings is a little celebrated change in how much people in Europe pay for oil versus the Americans – the drop in the Euro now means that the European advantage has evaporated and US consumers now get their oil a tad cheaper relative to the Europeans. Oil Insights explains:

From the first time in 3 years, on a relative basis oil is going to be cheaper in the US when compared to the Euro-zone. In addition to the sovereign debt crisis, the austerity measures, the public protest riots and the widespread distress and turmoil, the PIGS (Portugal, Italy, Greece, and Spain) now also need to worry about more expensive oil.

I cannot see oil doing anything but going down. Why is it staying buoyant?

19 thoughts on “Is oil too expensive right now?

  1. Realistically, the long term trend for a finite resource with nearly infinite demand is going to be for it to become more valuable over time, and changes in distribution only have short-term impact.

    Oil production per capita peaked a long time ago, and while we probably haven’t reached peak oil yet, the slope (rate of growth) of oil production is falling off:
    http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=50&pid=53&aid=1&cid=ww,&syid=1994&eyid=2010&freq=M&unit=TBPD

    Estimates of peak oil are now generally around 2012. This is a sufficiently short time-frame for even notoriously myopic big oil companies to see the benefit in staking claims to oil, but not selling it just yet – as it is clearly going to be worth far more in the future.

    This is a good thing, as it provides financial incentives to invest to reduce energy usage, and to produce more energy from non-fossil sources like wind and solar – rather than a more abrubt cut-off, which would leave the world relying on fossil fuels, but without the production needed.

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  2. Prices of stocks and commodities haven’t had any basis in reality for a while now. It’s all rigged.

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  3. A1kmm – my reading of the burst in literature during march this year puts peak oil in 2014, assuming that the global economy actually recovers before stalling again. Nonetheless, the time frame is so small and our planning and adaptation so feeble that it is now virtually pointless to have a ‘when is peak’ debate. In practical terms, it’s now. We are not shifting our transport systems away from their dependence on oil. Agriculture will get first cut of the diminishing pie, when the crunch comes.

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  4. Read Matt Simmons who has said the biggest problem is that 80% – 90% of drilling equipment worldwide is past it’s useby date and the oil companies don’t want to replace 70 million barrel a day worth of equipment (at a cost of hundreds of billions) when they knew reserves will start declining relentlessly within the next 10 years at some point…

    We are seeing the extreme price volatility predicted in the USDOE report of 2006 when oil starts to lose any relationship to normal supply and demand principals…

    In the linked graph you can see that we peak and plateaued in 2005 which caused a bubble and contributed to the GFC and now we are plateauing at a lower level, I simply think it is a case of a lack of ability raise production…
    But I’d never discount the oil companies oppurtunistic profiteering which we saw after the refinery blockade in the UK in 2000…

    http://transportblog.co.nz/2010/05/14/memo-to-the-government/

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  5. Nor should we discount the most likely probability that oil pricing is acutely tied to futures contracts — bidding up at near global volumes/capacity range serves to converge these things, eliminate spot pricing and attain speculative spikes… coming down from these on a lowering demand is exactly why specs ‘get into it’.

    Someone, I think was it Rimu, suggested how prices were/are “rigged”, which is one way – disgusted I’m sure – of describing this caper..

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  6. “I know the idea of oil being too dear is not a normal question canvassed here on frogblog, but I am left scratching my head as to why the price is staying stubbornly high when the data suggest it should be drifting downwards”

    Frog, perhaps the problem is that you are thinking in paper dollar terms. If you look at the price of oil in terms of gold, it has been tracking downward lately.

    Therefore, the problem isn’t that the price of oil isn’t going down, the problem is that our paper dollars are becoming more worthless.

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  7. Great point JJ…

    I hadn’t taken inflation into account in my thinking…

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  8. Declining Reserves and Declining Supply are two different things. Current plans still include supplying all of developing India and China with ALL the oil they want. (and all the coal)
    My (researched) opinion: – we’ll run out of air before running out of oil.

    Yes it is way too expensive – is holding back economic recovery world -wide, to serve the needlessly wealthy few.
    Power must be addictive – and a little knowledge dangerous.
    Though the benefits of less use are probably not lost on Gaia.

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  9. Well its down now and heading lower. It has broken past 70 twice now and will most like head to 65 somewhere in the near future. But its unlikely to fall below 60 without spurring OPEC into action.

    You should also take a look at Peak Oil debunked, a slightly dated resource that is a literal war zone between doomers/peakers and non-doomers. Interesting arguments and counter arguments.

    And thank you for the reference and the credit.

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  10. When you say the Europeans have paid less for oil than the US, are you referring to price of crude or the price of petrol at the pump?

    I cannot recall a time when the Europeans have paid less for gas at the pump than the motorists in the US.

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  11. Price of crude. The post referred to by frog shows the price of crude oil indexed to a base level over the last few years in both USD and Euro terms.

    Due to the depreciation of the US dollar, Europe as a whole only felt the crude oil price shock impact since a more valuable Euro deflated the crude oil price impact.

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  12. the price of oil has dropped 20% in the past two months..

    ..with minimal corresponding movement at the pump-prices here…

    phil(whoar.co.nz)

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  13. “It’s not a leak, Mr. Obama. It’s a volcanic gusher spewing out an Exxon
    Valdez every two to four days.”

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  14. Frog

    Something to consider is the inflation that is being conducted by stealth in most of the major economies. Note that the “recovery” in Stocks disappears if measured by the price of some yellow metal, and that there are a lot of people hedging in the commodities.

    I think you’re right (oil IS higher than it should be), but the economic systems of most of the world on on life-support with massive transfusions of green blood from the real taxpayers and workers to the banksters. Which makes for a lot of really strange activity. In addition there is the problem BP is having. Likely facing bankruptcy and other problems… and a lot of talent and money is being tied up in the effort to stop the leaks that would otherwise be in production and development.

    The leak is in effect, another face of peak-oil. In the rush to get at ever more difficult and expensive resources, the lack of willingness to pay the price of doing it safely probably means more “accidents”. I hadn’t thought of that before, but it seems reasonable.

    respectfully
    BJ

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  15. Yes, oil is too expensive right now. I also can’t believe that we’ve become so reliant on one resource that we freak out when the price of oil spikes and we find ourselves paying more than anticipated. You need to be able to live life without being so dependent on one thing or else your life will crumble when that one thing goes down the toilet.

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  16. The high price of oil (and presumably gas) should encourage more projects like this one:
    http://www.awatea.org.nz/docs/CHIME-Media-Release-20100415.pdf

    CHIME is Chatham Islands Marine Energy Limited, and the proposal is a 220kW LIMPET style wave-powered device similar to the one on the Scottish Isle of Islay.

    Stewart Island could be another suitable place to plant one of these and cut our oil usage.

    Trevor.

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