Our Latest Oil Predicament

It is impossible to tell the whole oil story, but perhaps I can offer a few insights regarding where we are today.

[1] We already seem to be back to the falling oil prices and refilling storage tanks scenario.

US crude oil stocks hit their low point on January 19, 2018 and have started to rise again. The amount of crude oil fill has averaged about 365,000 barrels per day since then. At the same time, prices of both Brent and WTI oil have fallen from their high points.

Figure 1. Average weekly spot Brent oil prices from EIA website, with circle pointing to recent downtick in prices.

Many people believe that the oil problem, when it hits, will be running out of oil. People with such a belief interpret a glut of oil to mean that we are still very far from any limit.

[2] An alternative story to running out of oil is that the economy is a self-organized system, operating under the laws of physics. With this story, too little demand for oil is as likely an outcome as a shortage of oil.

Oil and energy products are used to create everything, even jobs. If all humans have is energy from the sun, plus the energy that all animals have, then humans would be much more like chimpanzees. All humans would be able to do is gather plant food and catch a few easy-to-catch animals (earthworms and crickets, for example). They certainly could not extract oil or find uses for it.

It takes a self-organized economy to support the extraction and sale of energy products. We need a complex web that includes:

  • Equipment to extract the oil
  • Training for engineers and other workers
  • Devices that use oil, such as vehicles, farm equipment, road paving equipment
  • A financial system to enable transactions to purchase oil
  • Buyers with jobs that pay well enough that they can afford to buy goods made with oil

The things that go wrong with this economy can be on the buyers’ end of the economy. Buyers can have jobs, but these jobs may not pay well enough for the buyers to afford the output of the economy. A falling share of the population may be able to afford cars, for example.

[3] It is possible that a recent rapid increase in oil supply is contributing to the current mismatch between supply and demand. 

Data of the US Energy Information Administration indicates that US oil supply has recently begun to surge. It is not just crude oil production that is higher. Natural gas liquid production is higher as well. As a result, Total Liquids production is reported to have been more than 16 million barrels per day in November 2017.

Figure 2. US Liquids Production, based on International Energy Data provided by the US EIA.

Oil production of the rest of the world has been relatively flat, as planned.

Figure 3. World excluding the US oil production by type, based on EIA International Energy data through November 2017.

Total world production, combining the amounts on Figures 2 and 3, set a new record of 99.1 million barrels of oil per day for November 2017, based on EIA data. This level is above the November 2016 level, which was the previous record at 98.9 million barrels per day.

At this high level of production, it is not surprising that the economy cannot absorb the full amount of extra supply.

There are also a number of issues that affect buyers’ demand for oil.

[4] The percentage of US residents who can afford to buy a new automobile or light truck seems to be falling over time. 

If we look at the number of autos and trucks sold in the US, per 1000 population, we see a pattern of falling humps, as a smaller and smaller share of the population can afford a new car or light truck, each year. The big drops occur during the gray recessionary periods marked on the chart.

Figure 4. Figure showing US Passenger Cars and Light Trucks Purchased per Year per 1000 Population. Original graph by FRED (Federal Reserve of St. Louis). Retitled by author, because units were confusing on original chart.

The first peak came in 1978, at 67.3 units. The second, slightly lower peak came in 1986, at 66.7. The third peak came in 2000 at 61.5 units. The fourth peak came in 2015, at 51.6 units. Early 2018 amounts suggest that the trend in units sold per 1000 population will continue its downward trend.

Part of what is happening is that vehicles are becoming longer-lasting, so that there is not as much need to buy new cars frequently. But having a short-lived, cheap car has an advantage, if it makes cars available to a larger percentage of the total population. With a vehicle, a person has a much better ability to participate in the US workforce. US Labor Force Participation Rates peaked in about the year 2000, which is about the time of the third peak in affordability.

Figure 5. US Labor Force Participation Rate. Chart by FRED (Federal Reserve of St. Louis).

[5] There was a steep rise in the cost of auto ownership in the 1995- 2008 period. This has since fallen back, but the cost is still high relative to the wages of many workers.

One estimate of the cost of auto ownership is the reimbursement rate that the US government allows businesses to pay workers who use their own cars for company business.

Figure 6. Auto reimbursement rates as compiled on this list. Amounts shown on “As Stated” basis, and also at the 2017 cost level, based on CPI Urban.

These costs peaked about 2008 and were reflected in high reimbursement rates for 2009 as well. More recently, buyers of cars have been helped by longer term loans and ultra-low interest rates. If interest rates rise at all, the share of people buying or leasing new vehicles can be expected to fall further from the level shown on Figure 4.

[6] Building homes also requires oil. There has been a sharp drop in US home building, both on an absolute basis, and on a per capita basis, since 2008.

Figure 7. US Housing Units Completed, related to US population. Population from Census Bureau; population from UN 2017 population summary.

Building homes is part of oil demand. It takes oil to transport all of the materials used (lumber, siding, wiring, pipes, appliances) to the place where the house will be built. Furthermore, many of the materials used in building a home are produced using petroleum products.

The number of homes built depends on the number of new households that can afford a separate place to live. The low level of building makes it look as if the economy is still seeing a pattern of young adults living with their parents much longer than in the past. If buildings are to be replaced every 75 years, my calculation suggests that about 6 housing units per 1000 residents need to be built each year. About 2.5 units per thousand are needed, just to keep up with rising population, if upgrading and remodeling can be done almost indefinitely.

The fact that there is little home building reduces the number of jobs available in the building industry. The lack of jobs in this industry helps hold down the demand for oil, because these workers would use their wages to buy goods for themselves, such as food and vehicles. Food is grown and transported using vehicles powered by oil.

The lack of home building also contributes to the nation’s homelessness problem. If there were plenty of inexpensive apartments, there would be fewer homeless people.

[7] There is no longer an oil price at which both oil exporters and oil importers are satisfied. Oil prices today are too low for oil exporters.

I started writing about oil producers complaining that oil prices were too low in early 2014. At that time, oil companies were looking back at prices of over $100 per barrel in 2013. They were saying that $100+ prices were too low to provide adequate funds for reinvestment in new fields. Now prices are in the $65 range, which is even farther below the desired level.

Oil exporters are especially unhappy about today’s low prices, because they need high prices in order to collect needed tax revenue. This is why OPEC members and Russia have been holding back production. The plan is to deplete the glut of oil in storage, and thus get prices up.

It is not at all clear, however, that consumers in oil importing countries can really withstand higher prices. The fact that Brent oil prices could only stay above $70 per barrel for one week on Figure 2 (in the red circle), suggests that consumers in major oil importing countries cannot really withstand oil prices at this high level. I have observed previously that a sustainable price, without adding a huge amount of debt each year, is only about $20 per barrel.

[8] If we analyze vehicle purchases by country, we can see that low oil prices since 2014 seem to be helping major oil importers but are hurting Tier 2 countries that are commodity-dependent.

Figure 8. New vehicles (private passenger and commercial combined) purchased per capita for selected groupings of countries. Amounts shown are from OICA estimates by country.

In this chart, the grouping of Advanced Economies includes:

  • USA
  • Europe
  • Japan
  • Canada
  • Australia

For this grouping, growth in auto sales is again rising, but has not regained its prior level. This is somewhat similar to the indications in Figure 4, for the US only, looking at cars and light trucks. The main difference is in the last two years. Changes in currency relativities may be helping recent vehicle sales for the other countries in the grouping.

On this chart, the Tier 2 grouping includes:

  • Brazil
  • Russia
  • South Africa
  • South Korea
  • Malaysia
  • Mexico

This group includes several oil and other resource dependent countries. South Korea is perhaps more like the industrial countries in the first grouping. This grouping shows a downturn in the purchasing of vehicles in the last three years, when commodity prices have been depressed. If oil prices were higher, this group would probably be buying more vehicles.

Figure 8 shows that China’s auto sales have been growing rapidly. In fact, China has surpassed the Tier 2 average in per capita sales. In the past year, China’s growth in auto sales has flattened. But with China’s huge population, the absolute number of vehicles sold is still very high: 29.1 million vehicles, compared to 17.6 million for the United States, and compared to 20.9 million for Europe.

India and the Rest of the World account for surprisingly few vehicles sold. On Figure 8, their lines overlap at the bottom of the chart.

[9] The push toward raising interest rates and selling QE securities will tend to reduce oil prices and add to the oil glut.

I wrote about some of the issues involved in Raising Interest Rates Is Like Starting a Fission Chain Reaction. When interest rates are higher, economies are pushed in the direction of recession. All kinds of discretionary spending are reduced. Use of oil will almost certainly be reduced. This could lower oil prices significantly, as it did in 2008 (Figure 1).

[10] To a significant extent, China has been helping hold up world oil consumption, with its rapidly growing economy. It is hitting headwinds now, however.

The International Monetary Fund recently showed an exhibit indicating how China’s debt is growing very rapidly, but its growth in output is slowing. The combination could very easily lead to a credit crisis.

Figure 9. Exhibit from IMF Working Paper called Credit Booms: Is China Different?

Now, the rest of the world depends on China for many imported goods. If China should have problems, it would indirectly affect oil demand elsewhere as well.

Even China’s recent ban on importing certain types of materials for recycling can be expected to have an adverse impact on oil demand. Very often, if a container is sent from China to the US or to Europe, there will be no exported goods to send back to China, except for material for recycling. If China refuses to take recycling, containers will need to be returned empty.

Recycling generally needs to be subsidized. Part of what this subsidy is used for is to pay the cost of shipping material to be recycled to China. If China does not take the recycling, this payment for shipping materials in the otherwise-empty containers will not be made. The shipping company will need to charge exporters more for the one-way trip, if the shipping company is to be profitable. This higher cost, by itself, is a deterrent to trade. In many ways, the higher shipping cost is like a tariff.

[11] Conclusion.

My expectation is that the general direction of oil prices is likely downward, especially if interest rates rise. A major financial disruption of any kind would have a similar effect. Gluts of oil can be expected with lower prices.

Many groups, including the IEA, have been warning about oil shortages because of inadequate investment in new production. Oil shortages, and energy shortages in general, have a multitude of adverse impacts on economies. One of them is loss of jobs, because jobs require the use of energy, for example, to deliver goods in a truck. If many more people are unemployed, there is less demand for oil.

Thus, it is not at all clear that a shortage of oil leads to high prices; it may very well lead to lower prices. Many people are confused about this issue, because the word demand gives a misleading impression of the mechanism involved. Lack of demand comes from part of the population not being able to afford cars and homes. It also comes from cutbacks in government spending and from failing businesses. In an interconnected system, even failing banks tend to reduce oil demand.

Another adverse impact of oil and energy shortages tends to be fighting and wars. The fact that the US seems to be raising its energy production, in apparent disregard for countries that have been trying to cut back, is likely to make some oil exporting countries quite angry. It could sow the seeds for another war.

Economists do not seem to understand that GDP growth rates don’t tell very much about the well-being of individual citizens in an economy. A major issue is wage disparity. If there are many very low wage people, there is likely to be downward pressure on the sale of automobiles, and on the purchase of petroleum products. Economists are likely to think everything is fine, up until a major crisis occurs.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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788 Responses to Our Latest Oil Predicament

  1. Yoshua says:

    The propaganda chief at Rus sia Today sent this bizarre message today:

    “Dear friends in the West: We don’t respect you anymore!”
    “Pu tin isn’t our president, he is our Fuhr er!”

  2. JH Wyoming says:


    China made a solar panel highway. Stranger than fiction. I wonder how durable it will be.

    • Skeptic says:

      This is a gimmick. Someone would have to be stupid to create a solar panel highway. 1) cars traveling over it would reduce the effectiveness 2) the way solar panels work is if any cell is “shaded” then it drops efficiency of the whole panel. Cars over this will have this effect 3) The lifespan of solar panels is longer than that of the road, so it would be a colossal waste of panels 4) The panels will get covered with debris and blockers (such as leaking oil) and not to mention they are not durable enough to withstand cars passing over them for 30 years.

    • I am sure that the reason they would create one of these is to try to have a new product that they can sell to the world. They are too sensible to scale them up themselves.

      • JH Wyoming says:

        Good point, Gail. It’s a big sales pitch! You too can pave your roads with solar panels. Now sign here and we’ll start shipping them to you with complete installation instructions (that sort of make sense if you correct for good English).

    • Rufus says:

      As mentioned in the article, the first “solar panel road” was inaugurated in France in 2016. Well it is a 1 km (0,6 mile) prototype. It was the wish of our former environment minister Mrs Segolene Royale, a terrible egomaniac incompetent politic woman, a green groupie. Her role is to tell the story that green electricity will replace FF and reduce carbon emissions according to COP xx agreements, and save us all. She’s giving hope, providing a future, proving that “there are solutions” (as a good friend of mind tells me).

      The idea of using roads, highways, parking places, for solar panels, is to avoid to use lands, fields, that are used for agriculture. Good point, no ? We don’t have so much space in western Europe than you have in U.S., like you have in the Midwest (and that’s why we are very much reluctant to frack the ground to extract shale gas –considering the fact that we would have reserves that might be promising).

      The produced electricity by the road is meant to power traffic signalization devices. Not a big deal ! The cost is 170 EUR / Watt instead of 1 Watt for a standard industrial solar panel central.

      The final fun fact is that the installation is set in Normandy. A Northern part of France known (or is is it a cliché) for its awful weather, cloudy, and rainy, while South of France (Cannes, Cote d’Azur) is very sunny. What the … ?

      Here is a link to critical article in French from a rather decent scientific magazine : https://www.sciencesetavenir.fr/nature-environnement/developpement-durable/la-route-solaire-est-elle-finalement-une-bonne-idee_109562

      • xabier says:

        This is the sort of thing which is being put on trial in the EU ‘Project Stardust’ towns: three of them, one is my family’s home town Pamplona.

  3. Fast Eddy says:

    When do we get the manslaughter charges?

    Uber Halts All Autonomous Car Tests; Police Say Vehicle Showed “No Sign Of Slowing” In Deadly Crash


    • This looks like a claim to settle, rather than going to trial. Of course, if the woman who was hit was homeless, and has no identifiable kin (we don’t know that yet), there may be no suit at all.

      • djerek says:

        Doesn’t appear that she was homeless. Her name was Elaine Herzberg. This appears to be her facebook page: https://www.facebook.com/elaine.herzberg.58

        • The Zerohedge article seemed to suggest that she might be homeless, but that was probably someone’s speculation.

          • Fast Eddy says:

            That came from UBER’s PR Dept …. who were thinking – how can we get the masses to ignore this … oh I know … suggest she was homeless…. homeless people don’t matter…. they are irritants… dangerous… drug addicts….. so the perception will be that this event is a good thing …

            Ok … let’s go with that.

        • She says this about herself on the site, if I am reading it correctly:

          “became a mother at 15yrs. old ~ had daughter at 18yrs. old ~ married 3 xs ~ stays active in community ~ is currently active in freinds circle ~ very appreciated by her freinds”

          With respect to current marital status, she describes herself as “separated.”

          • Fast Eddy says:

            Every time (and it is not often) I look at someone’s FB page… I am amazed at the information people put on there… it’s like here’s my entire life on a web page … no privacy whatsoever…

            As if anyone really gives a f789.

            Well… I guess everyone wants to be famous… like Paris and Kim….and Justin….(and Fast Eddy snicker….) and FB (and other social media) pander to that overwhelming desire in so many people…

      • Fast Eddy says:

        She looks a lot like my long lost sister…. I must get down to the morgue to identify — and claim her… poor thing… she ran off at 15 and joined the circus… and we never heard from her again…. oh boo hoo… I am in mourning…. this is so tragic… my lovely darling little sister …. boo hoo hoo….

    • JH Wyoming says:

      I thought driverless autos were designed to scan in 360 degrees. If it didn’t slow down when it hit someone, then it wasn’t getting that data or at least not responding to it. The computer handling that car is fired!

  4. Fast Eddy says:

    What’s Going on in the Treasury Market?

    Will we see a “monetary shock?”

    Back in October 2015, the three-month Treasury yield was 0%. Many on Wall Street said that the Fed could never raise interest rates, that the zero-interest-rate policy had become a permanent fixture, like in Japan, and that the Fed could never unload the securities it had acquired during QE. How things have changed!

    On Friday, the three-month Treasury yield closed at 1.78%, the highest since August 19, 2008. When yields rise, by definition bond prices fall:


    • It takes a little while to get feedback from higher interest rates. It seems like the Federal Reserve would have the good sense to go slow, but maybe not. US interest rates affect a lot of debt around the world, directly or indirectly, because of where the dollar floats with the changing interest rates. We now have a huge amount of derivatives outstanding as well.

    • Davidin100millionbilliontrillionzillionyears says:

      US 3-mo is now up to 1.795%…

      but, the US 10-yr was heading for 3+%, and They played whack-a-mole and now it’s down to 2.86%…

      that almost unbroken trend since 2015 can’t continue…

      I doubt that They will let this get out of control…

      we all know, They are not stu pid…

      • Fast Eddy says:

        Nope… they are definitely not st u pid…. a re tar ded 7yr old could be made to understand that a significantly higher interest rate … would collapse the global economy

  5. Baby Doomer says:

    Norway government on the brink of collapse

    Norway’s centre-right government was teetering on the brink of collapse on Monday after opposition parties said they would support a no-confidence motion in a contentious anti-immigration minister.

    Norway has been roiled for days by the fallout from comments by justice minister Sylvi Listhaug that the centre-left Labour opposition party believed “terrorists’ rights are more important than the nation’s security”. That touched a nerve as Labour and its youth organisation were the main targets of Anders Breivik, who killed 77 people in 2011.

    Over the weekend, Norwegian media quoted people close to Erna Solberg, the conservative prime minister, saying she and her three-party minority government would resign if the no-confidence vote succeeded against Ms Listhaug, a member of the junior coalition partner Progress.

    Ms Listhaug is a polarising figure in Norway because of her strident anti-immigration views. One of the parties Ms Listhaug offended in the past, the small Christian Democrats, threatened her future on Monday by backing the main leftwing parties, including Labour, in the vote against the justice minister.

    Christian Democrats “do not have confidence in the sitting justice minister and therefore ask Erna Solberg to take action to avoid a no-confidence vote in parliament [on Tuesday]”, Knut Hareide, their leader, said.

    Snap elections are not allowed in Norway with the next vote due in 2021. But there are several ways out of the crisis, including Ms Listhaug resigning or Ms Solberg reshuffling her cabinet. If Ms Solberg does resign, it could open the door to Jonas Gahr Store, the Labour leader, to try and form a coalition.

    The presence of the populist Progress party in government is being closely watched across Europe as it was one of the first in a series of anti-immigration groups to gain power in recent years. Ms Listhaug, a former immigration minister, has shocked many on the left with her frank comments on immigrants.

    “Listhaug likes flying close to the sun. One day she will get burned. I just hope it isn’t too costly for the rest of us,” said a Norwegian chief executive recently.

    But to her supporters, she is seen as one of the few politicians willing to speak out on the dangers and fears of immigration. Some political analysts believe that Norway has avoided an extreme far-right party gaining power by letting the more moderate Progress into government and allowing Ms Listhaug to act as an outlet for anti-immigration frustrations.

    Ms Listhaug finally apologised last week over her Facebook comments after many days of refusing to do so. Some Labour politicians believe that if Ms Listhaug were to apologise again and Ms Solberg asked parliament to vote on the future of the entire government, the Christian Democrats would be more likely to back the prime minister.


  6. jerry says:

    The Telegraph is running an article entitled

    Saudis ‘may run out of oil to export by 2030’

    A report by Citigroup has warned that Saudi Arabia could run out of oil to export by 2030, raising fears that oil prices may rise significantly in coming years.

    “If nothing changes, Saudi may have no available oil for export by 2030,” Citi analyst Heidy Rehman wrote.


    how does that grab ya!!!!

    and get this after speaking with an executive about the Alberta oilsands a couple of weeks ago and their desire to frack in that area he said he got his degree by writing his thesis on fracking and concluded that the Alberta oilsands has about 20 years left of oil. What perked my interest however, was his view that it is a strategic reserve of the US! It is why all of the American oil companies are there. If something were to happen to the Middle East that is where America will turn? Wow, i thought too myself.

    • Lastcall says:

      Echo’s of the middle east; the shambles over there is a direct result of some of those countries mistakenly thinking it was their oil. How absurd. The history of Iran is of the struggle to own the oil revenues.

      Canada may get a front-row seat in the future as yet another example of ‘The Curse of Oil’.

    • Davidin100millionbilliontrillionzillionyears says:

      “Saudi Arabia consumes 25pc of its oil output…”

      sell more oil, get richer, consume more oil…

      this is the Export Land Model…


      “It models the decline in oil exports that result when an exporting nation experiences both a peak in oil production and an increase in domestic oil consumption. In such cases, exports decline at a far faster rate than the decline in oil production alone.”

      after a country “peaks”, the average is ONLY 9 YEARS until it hits ZERO EXPORTS…

      so, the amount of oil exported in the world will fall faster than the decline in oil production…

      welcome to the 2030s…

    • Ed says:

      How long until SA is down 50% on exports? Which Saudi despots get their take cut?

  7. Fast Eddy says:

    Just thinking about this FB thing… scanning through that ‘homeless’ person’s entire life…


    And reading some of the inane commentary…

    How is it possible that u look YOUNGER???

    Beautiful pic Sis! You have always been Beautiful!

    And I am feeling the vomit surge up through my throat and nasal passage… you know .. that acidic burning feeling like after drinking too much and forcing yourself to vomit….

    And I am thinking …. how absolutely f789ed up humans are…. revolting … disgusting…. more onic…

    And then I am thinking how the El ders must think of humans as less intelligent than donkeys… and far more easily trained….

    The sooner we are exterminated… the better….

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