Will 2011 be a rerun of 2008?

Written By: - Date published: 12:20 pm, January 12th, 2011 - 22 comments
Categories: Economy - Tags: , ,

This post has been borrowed from the excellent site theoildrum.com, after originally being published on ourfiniteworld.com.

We all remember the oil price run-up (and run back down) of 2008. Now, with prices similar to where they were in the fall of 2007, the question quite naturally arises as to whether we are headed for another similar scenario.

Of course, we know that the scenario cannot really be the same. World economies are now much weaker than in late 2007. Several countries are having problems with debt, even with oil at its current price. If the oil price rises by $20 or $30 or $40 barrel, we can be pretty sure that those countries will be in much worse financial condition. And while governments have learned to deal with collapsing banks, citizens have a “been there, done that” attitude. They may not be as willing to bail out banks that seem to be contributing to the problems of the day.

If we look back at what happened three years ago, there was a huge run up in the price of oil, but very little change in oil supply.


Figure 1. Production of oil (crude and condensate) for OPEC and Non-OPEC countries, compared to West Texas intermediate oil price, in September 2010$. Based on EIA data.

Oil price roughly corresponded to today’s price in October 2007. Between then and July 2008 (the peak in both prices and production), OPEC increased its oil supply by 1.3 million barrels. Non-OPEC actually decreased its supply by about 0.3 million barrels a day between October 2007 and July 2008, providing a net increase in oil supply of only about 1 million barrels a day, despite the huge run-up in prices.

It can be seen from the above graph that the supply of OPEC oil has tended to increase, as oil prices increase. Non-OPEC supply has been much less responsive to price. This is another way of graphing the relationship between oil price and oil production:


Figure 2. Relationship of oil production (crude and condensate) and West Texas Intermediate price, expressed in September 2010 $, based on monthly EIA data from January 2001 through September 2010.

In Figure 2, as oil price increases along the horizontal axis, we see that non-OPEC oil production remains virtually flat. As oil price increases for the OPEC 12, we see the kind of supply curve we might expect to see for a supplier that has a small amount of more expensive capacity that it can put on line when prices justify it. The catch is that the amount of supply added as prices rise isn’t really very much–as we just saw, 1.3 million barrels a day, between October 2007 and July 2008.

Eventually, the economy could not handle the high oil prices, and prices dropped. Credit availability began dropping and recession became a greater and greater issue.

Will this time be different? It seems to me that OPEC has done a good job of convincing the world that it has a lot of extra supply, but it is less than clear that it has much more excess capacity than it had in the 2007-2008 period. OPEC shows this image on its website, but this may just be a long-standing approach aimed at convincing the world that it has more oil (and power) than it really does.


Figure 3. OPEC’s view of its own spare capacity.

Spare capacity, like oil reserves, is not audited. The higher the numbers proclaimed to the world, the more powerful OPEC appears, both in the eyes of its own people, and in the eyes of people around the world. OPEC shows lists of new projects and investment amounts, but it is not clear that the new capacity being added is more than what is needed to offset declines in other fields. The new production amounts listed (shown separately by country–this is the one for Saudi Arabia) come to something like 6% of production – this could simply represent offsets to declines in fields elsewhere. The problem is we really don’t know, because no auditing is ever done. We are just expected to trust Saudi Arabia and OPEC on a matter of importance to the world.

OPEC tells us it is acting as a cartel, but when a person looks closely at the data, only three countries appear to be pumping at less than full capacity: Saudi Arabia, United Arab Emirates, and Kuwait. Production rises and falls with price for these countries. It is not all that difficult to coordinate the activities of three countries, especially when one of them–Saudi Arabia–is doing most of the adjustment to oil supply. So all of OPEC’s marvelous abilities may not be all that marvelous. If Saudi Arabia knows it can sell oil it withholds from the market at a higher price later, it is not a bad move to hold a bit of oil off the market, and claim that the amount being held off the market is much higher.

In the next year, there is a significant chance that oil demand may rise. While oil supplies are at this point adequate, if demand continues to grow, we could very well see another surge in oil prices, and another test as to whether there really is spare capacity. If the supply curves shown in Figure 2 are any indication, we won’t be getting much more oil, perhaps another 1.5 million barrels a day, even if prices spike.

The one possibility that would seem to postpone such a price run-up is if world economies in the very near term start heading into major recession. Such a recession might indicate that even the current oil price is too high for economies to handle, in their weakened state.

I believe the limit on how much oil will be supplied is not the amount of oil in the ground; rather the limit is how high a price economies can afford. This in turn is tied to the true value of the oil to society–whether oil can really be used to produce goods and services to justify its price. The problems we experienced in 2008, and may experience in the not-to-distant future, suggest that we may be reaching this limit.

22 comments on “Will 2011 be a rerun of 2008? ”

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  1. Colonial Viper 1
    12 January 2011 at 12:30 pm

    Your analysis is excellent. One other factor to consider: economies in developing nations that are still growing are driving oil demand, and consequently oil prices up.

    Therefore developed nations may get both bad ends of the stick – weakening economies, and higher oil prices battering those weakining economies further.

    Those oil prices will not reduce just because demand in western countries reduce. Because demand levels from these richer developed countries are not the main variable like it was just 10 years ago.

  2. climate justice 2
    12 January 2011 at 1:35 pm

    I look forward to Auckland and Wellington getting their rail transport projects underway.
    Gareth Huges ran a cupcake fundraiser at Britomart to buy back Transport Minister from road and truck lobby.. hopefully that will help speed our transport policies along.

    There is a good article on Queensland, climate change and floods below
    If we don’t sort out our energy approach to peak oil, there will be more and more calls from the likes of Solid Energy for New Zealand to use Lignite diesel (Lignite and climate change: The high cost of low grade coal, Parliamentary Commissioner for the Environment http://www.youtube.com/watch?v=83KVIU9RlMs) instead of transitioning to a low carbon economy based on clean energy.

    I look forward to seeing Labour’s response to peak oil as its policy development firms up this year.

    Queensland Floods and Climate Change

    Have you noticed that no-one in the media is discussing Climate Change and the devastating Queensland floods? Floods that are directly affecting over 200,000 people, closing down three quarters of the coal mining industry in the state, plus major highways, rail links and public airports. Estimates of the damage are now running into the billions of dollars with at least 10 people killed so far. http://indymedia.org.au/2011/01/06/the-queensland-big-wet-big-flood-and-climate-change

    While Queensland is in the middle of the disasterous floods, one of the world’s largest insurers, Munich Re announced that the number of climate related disasters soared in 2010 killing as many as 295,000 people

    Coal mined from Queensland is a major source of global carbon emissions, but because most of the coal is exported, the resulting emissions are not included as Australia’s problem. Climate scientist James Hansen has said repeatedly we need to stop burning coal to reduce emissions and tax carbon, “It’s as certain that as long as fossil fuels are the cheapest energy, we will just keep burning them. So we have to put a tax on carbon which rises over time.” he told the Independent.

    • Bill 2.1
      12 January 2011 at 2:08 pm

      @cj

      In relation to the coal component of your comment, I’m always suspicious that air travel is exempt from various emmission programmes. It had crossed my mind that there isn’t too much in the way of a sequestration capability at 30 000 ft or whatever.

      A wee search on google threw up two articles. One from 2005 claiming that “UK homes, firms and motorists will have to cut carbon dioxide emissions to zero due to air travel growth…”

      http://news.bbc.co.uk/2/hi/science/nature/4266466.stm

      And a second from 2007 claiming that “Scientists say carbon emissions in the atmosphere are at least twice as harmful to the environment as those at sea level” (emphasis added)

      http://www.guardian.co.uk/environment/2007/oct/10/carbonemissions.travelnews

      I’d be curious as to how global air travel measures up in terms of damage caused in comparison to global coal burning. That’s not to defend the burning of coal but like I say, I’m suspicious about the cone of silence that surrounds the impact of air travel and any info you might have on that front would be appreciated.

  3. Bill 3
    12 January 2011 at 1:50 pm

    Roughly, what percentage of the rise in oil during ’08 was due to rising demand and falling supply…or increasing production costs etc, and what percentage of the rise was due to speculative trading?

    Anybody got figures?

    • Bright Red 3.1
      12 January 2011 at 2:11 pm

      hard to differentiate because speculators are buying on the back of higher demand in the belief that people will pay a higher price for the product (and then once the bubble forms in the belief that another speculator will pay more in the future).

      But, we know the most expensive oil projects online at the moment (ie the price-setting ones) are profitable at about $70 a barrel http://www.parliament.nz/en-NZ/ParlSupport/ResearchPapers/4/6/a/00PLEco10041-The-next-oil-shock.htm

      On top of the estimated production cost from a given well, oil companies need a margin for exploration costs including unsuccessful wells and profit to make drilling worthwhile – there’s a technical term for this margin but I can’t remember what it is. It’s not an insubstantial amount something like $15 a barrel but rising with exploration getting more expensive.

      • George.com 3.1.1
        12 January 2011 at 11:25 pm

        Listening to the radio yesterday, a BBC report (I think) covered the Brazilian company Petrobas. It has discovered a significant off shore oil field. The field is, from memory, about 2 km underwater with another 3 km of rock and then 2 km of salt layers before oil is reached. Yes, large oil fields are still being found, but not easy to access ones.

        • Colonial Viper 3.1.1.1
          12 January 2011 at 11:48 pm

          Petrobras’ new “Lula” field contains 6.5B barrels of oil and gas. It is Brazil’s largest oil field find ever by far, and also its first “supergiant” oil field.

          Lets assume that its all oil, for simplification.

          The US requires 21M barrels of oil per day to feed its requirements. The supergiant Lula field is therefore big enough to feed US needs for…309 days.

          If the US were to rely on it solely for its oil needs, this supergiant oil field would be empty by Christmas.

  4. Newby 4
    12 January 2011 at 1:50 pm

    Something I’ve been wondering about lately – do insurance companies include climate change as a risk into their premiums somehow? That would be acknowledgement by big business that it’s real (even if, as far as I can make out, business interests by and large seem to be on the denial bandwagon).

    ^ a genuine question – I’m uninformed and curious

    • Doug 4.1
      12 January 2011 at 4:29 pm

      I know that both Munich Re and Swiss Re are very concerned about the acturial implications of AGW. They are already seeing it in their data, increased claims due to extreme weather events.

  5. Bright Red 5
    12 January 2011 at 2:45 pm

    that second graph is a really good way of looking at it (although price should be on the vertical axis). It shows the elasticity of supply for oil is near zero – ie. it doesn’t matter how much price goes up, supply doesn’t increase hardly at all.

    Since they’re going to be selling the same amount regardless, oil producers, then, want to be selling at a sweet spot that gets as much money as possible without throwing the world into recession and destroying demand.

    Since we’re still in this so-called recovery stage of the Great Recession, it won’t take much to go above that sweetspot again and send the global economy falling.

    • Colonial Viper 5.1
      12 January 2011 at 5:53 pm

      Any US recovery has been in very limited sectors of the economy.

      Stock prices, corporate profits, bankers bonuses. If you are not a big player in those arenas, you’re still being screwed.

  6. climate justice 6
    12 January 2011 at 3:11 pm

    Bill I suspect airline companies will push for biofuels for air travel (Richard Branson, Air NZ etc are doing research and advocating in that direction).

    Yes like you say, aviation emissions are often ignored. I am not sure re figures, I imagine a lot of research was done in the UK when their was the campaign against the proposed Heathrow airport expansion that was defeated.

    Here is a critique of current biofuel aviation plans:
    Use of Biofuels in Airplanes Will Lead to Faster Deforestation and Climate Change; Activists Urge the EU to End Subsidies for Biofuels to Avoid Disaster for Forest Dependent Communities and the Environment. A roadmap for introducing biofuel blends into commercial jet fuel, to be discussed today at the World Biofuels Conference in Amsterdam, will lead to faster deforestation and climate change. It also spells disaster for Indigenous peoples and other forest-dependent communities and small farmers.
    http://www.globalforestcoalition.org/?p=28

    Plane Stupid (www.planestupid.com) and the Airport Watch umbrella group would likely have research on aviation and emissions. Plane Stupid (UK) aims for:
    * End to short haul flights and airport expansion
    * Stop aviation advertising
    * A just transition to sustainable jobs and transport

    Some transport unions are being proactive on transport and emissions:

    The report by ITF (International Transport Workers’ Federation – the global transport union), which represents 4.6 million workers worldwide, recommends a moratorium on transport liberalisation (deregulation and internationalisation), greater use of high-speed trains instead of airplanes, and increasing the energy efficiency of transport methods and vehicles through technological advances.
    (from an article about the ITF 2010 congress)

    Here is their page on climate change
    http://www.itfglobal.org/education/climatechange.cfm and this is worth a read:
    The ITF has emphasised the importance of forging links between unions and social movements to give transport workers a voice in the climate change debate.
    http://www.itfglobal.org/news-online/index.cfm/newsdetail/5479

  7. Afewknowthetruth 7
    12 January 2011 at 4:41 pm

    Most, if not all, western nations are now in a far worse state than in 2008, Britain being a good example: North Sea oil extraction is falling off the cliff (down around 25% in the past 18 months I believe), leading to an ever greater energy deficit (and wosening balance of payments), house prices have fallen and are flagged to fall even more, and the so-called recovery is a ‘jobless recovery’. Ireland is essentially kaput, as are Portugal, Italy Greece, Spain and numerous eastern European nations. The US continues to survive for the moment via the ‘printing presses’, but unemployment and food stamp dependency continue to rise, foreclosures continue largely unabated, and state and municipal finances are imploding at an ever faster rate. And US oil extraction continues to fall. Most western governments are responding to the mess by raising consumption taxes and other ‘austerity mesures’, which further supresses demand.

    With the world becoming flooded with consumer goods and higher production costs, China cannot expect the kind of rampant gowth witnessed in previous years. Indeed, there is talk of a Chinese property bubble about to burst.

    Add to the mix the rapid rise in food prices, as food production gets hit by climate change and rising production costs.

    So 2011 looks set to deliver a huge amount of demand destruction, which will translate into further job losses and further demand destruction, a vicious cycle which may well see oil prices level off or even fall. And maybe some more governments fall.

    Of particular significand is the Hirsch report (of 2005) which noted that a smooth transition to a an economy with a low dependency on oil would require a transition period of 20 years. The International Energy Agency recently admitted that peak oil was in 2005/6 (just as many peak oil activists had long indicated), which means we are now 25 YEARS BEHIND IN OUR PLANNING. Not that central government or district councils are the least bit interested in planning for the future, or the welfare of the community: everythig they promote -tourism, road building, sports arenas etc. -is predicated on squandering more oil and generating ever more greenhouse gases, while loading up debt levels. Truly surreal!

    What it all amounts to in the medium term is partial or full economic collapse (2012-15) followed by complete collaspe of western-style civilisation (probably 2016-20) as we fall off the oil depletion curve: that’s somehting few are ready to talk about yet.

    BIll: Air travel is a sacred and taboo subject in government circles. the fact that aviation fuel is largely untaxed, that jet emissions have been linked to ozone depletion, or that air travel is one of the least fuel efficient forms of transport invented are ‘unmentionables’.

    By the way, there is no such thing as carbon sequestration: coal and oil are the closest we are ever going to see -nature’s way of getting all that excess carbon out of the system and stored away safely- and the game the stupid naked apes are playing is to get them out the ground as quickly as possible and burn them!

    And there is no such thing as ‘biofuels’, though we can burn food in machines instead of feeding people.

  8. M 8
    12 January 2011 at 9:06 pm

    ‘Air travel is a sacred and taboo subject in government circles.’

    And it would appear so in many other circles as there has been a rash of air travel and tourism training courses for people on TV at the moment which incense me no end. People who pay for these courses, or worse, borrow to pay for them will have absolutely no chance of a job at the end and may have a massive debt hanging around their necks.

    • Lanthanide 8.1
      12 January 2011 at 10:07 pm

      “there has been a rash of air travel and tourism training courses for people on TV at the moment”

      There are lots of courses advertising now, because it’s the start of the new year.

  9. mouse 9
    12 January 2011 at 9:37 pm

    @AfewKnowtheTruth…. The time to usher the people to the life rafts in an orderly fashion has past.

    Focus on saving yourself first!… Darwin sorts out the stupid.

  10. climate justice 10
    12 January 2011 at 10:11 pm

    The most impressive plan I have seen recently is this one from Australia by
    http://beyondzeroemissions.org

    I think New Zealand should look at doing the same thing…

    http://beyondzeroemissions.org/zero-carbon-australia-stationary-energy-plan-available-now-download-or-purchase-your-copy

    As you can see it has a lot of supporters:

    “This is an ambitious, technically feasible plan that should be looked at seriously”
    Tim Flannery
    Professor Faculty of Science
    Macquarie University
    Australian of the Year 2007

    “The Zero Carbon Australia Stationary Energy Plan is a provocative and timely contribution to the climate change debate, and it deserves attention both here and abroad. The Plan demolishes a pile of conventional wisdom that Australian policymakers still seem unable to get past. The sorry history of Australian climate policy procrastination is littered with polluter-friendly analyses conducted by economic hired guns. Their work has been used to argue against action, or for illusory schemes that price carbon without reducing the greenhouse pollution billowing from Australian smokestacks and tailpipes. The effect has been to constrain debate and obscure from our view a very different vision—a rapid switch from fossil to renewable energy that makes economic and environmental sense. By highlighting one of many pathways to achieving that vision, the ZCA report sheds light where it is desperately needed.”
    Dr Guy Pearse
    Research Fellow, Global Change Institute
    University of Queensland
    Author of High & Dry and Quarry Vision

    “I get to work with people all over the world in the fight against global warming, a fight growing increasingly desperate as temperatures climb and rainfall patterns shift. Since Australia leads the world in per capita emissions, it makes sense that its transition planners would be thinking big. This transition obviously won’t be easy or simple or cost-free, but given the alternatives it’s very nice to know it’s technically feasible!”
    Bill McKibben
    Scholar in residence at Middlebury College, Author and Founder 350.org

    I won’t go on, but the messages of strong support do.
    The difference with their plan is that it is strong and ambitious, the opposite of the fence sitting of National. Bill English even said (while talking about Lignite in Southland.):

    “The Emissions Trading Scheme, while copping a lot of criticism, was important to attract capital investment especially for high- carbon resources”

    The Zero Carbon Australia Stationary Energy Plan is the kind of approach that can work.
    There are other associted projects going on like:
    The Climate Emergency Network has initiated a project to model economy-wide solutions to produce a 10 year transition to a safe climate economy across Australia. The project is called Plan Z.E.D. Zero Emissions Decade .

    Despite Australia’s high emissions and over reliance on coal, it looks like they are far more organised than New Zealand when it comes to overall advanced plans for how to reduce emissions and build a low carbon economy.

  11. Adrian 11
    12 January 2011 at 11:48 pm

    My understanding of West Texas Crude is that it is like the mythical NZ Dollar , traded hundreds and thousands of times more than its actual quantity. Apparently there is very little of it left or even being pumped and it wouldn’t surprise me if the truth is that it is no more than a vehicle for financial manipulation. Which would explain its fluctuations. In a book that I read written by an oil industry analyst ( which I can’t remember the name of.. Oil Wars possibly?). Most oil still only costs in the single digit dollars to extract, and the vast amount of it ( 80-90%?) is on long term contracts around the $20 to $30 dollar a barrel mark. Hence the use of WTC to manipulate prices for whatever reasons.He made the point that even as a top level analyst he found it almost impossible to get any acurate figures on anything. I was also under the impression that the 2008 problem was lack of processing capacity to keep up with Chinese and Indian demand for diesel. I’d like to know what the going rate in China and India is for retail diesel, I’ll bet it’s not $1.40 a litre.

  12. climate justice 12
    13 January 2011 at 12:02 am

    I sense China is getting despertate – there was a Lignite diesel conference in China last year (Coal to Liquids – That Don Elder from Solid Energy spoke at)
    this is a rather clunky article but it details some of China’s Lignite coal Diesel plans:

    http://af.reuters.com/article/energyOilNews/idAFL3E7CA0S120110111
    Coal-to-liquids was once regarded as one of the most exciting technologies. Dozens of projects were launched as Beijing looked for alternatives to crude oil imports. China went cold on CTL in 2008, suspending most of the projects on concerns the technology was expensive and wasted too much water, especially in poor, arid regions. Experts regard CTL as an emergency measure, and it is no coincidence the liquefaction technologies were developed by fuel-hungry Germany during the Second World War and embargo-hit South Africa during the apartheid era. A CTL plant built by the state-owned coal giant Shenhua Group is expected to produce 11 million tonnes of oil products a year by 2020

    Apart from its excessive use of water, CTL also does nothing by itself to address a more pressing global concern — carbon dioxide emissions.

    (the article goes on in a lot of detail about China and coal.)

  13. climate justice 13
    13 January 2011 at 12:31 am

    It looks like China may be after Brownlee’s sexycoal:

    ….The focus of the current negotiations is to buy rights to an estimated 2 billion tonnes of southern lignite, half of which could be converted to petro-chemicals or lignite briquettes.

    Qinghua’s joint venture partners Greywolf Gold-mining, incorporated in March this year, are spearheading project analysis, saying Qinghua has $10 billion to spend in New Zealand in 2011.

    the wolf in sheeps clothing:

    Otago and Southland lignite deposits could be used for petrochemical or briquetting plants.

    Qinghua’s joint venture partners Greywolf Gold-mining, incorporated in March this year, are spearheading project analysis, saying Qinghua has $10 billion to spend in New Zealand in 2011.

    “We had hoped to make announcements in the new year, but the [three New Zealand] visits by Qinghua have been attracting attention,” said Mr Lancaster, whose company directors include brother Michael and son Jolian.

    Chartered flights across the South Island have included meeting several southern mayors and visits to mine sites, Mr Lancaster said.

    Mr Lancaster said meetings were being sought through the offices of Prime Minister John Key and Energy and Resources Minister Gerry Brownlee…

  14. tc 14
    13 January 2011 at 5:39 pm

    Yes the impact of aircraft is not be underestimated, a freight 747 pumps about a ton of carbon an hours into the upper atmosphere where as pointed out it stays.

    Chatting to a retired flight engineer who did the china/europe/us runs he reckoned comparing the last years up to the GFC with say the mid 90’s in terms of air traffic in/out of china was like akl motorways at 3am on a weeknight compared to peak hour jams.

    Then there’s the overall growth in air traffic globally outside china

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