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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2,023 Responses to Our Latest Oil Predicament

  1. dolph says:

    I’m hoping to see the demise of many nerdy type celebrities or rich goons, like Bill Gates, Warren Buffet, Henry Kissinger, George Soros, etc.

    Let me say that I disagree that oil price is headed down, at least in any meaningful sense. We are at the peak glut now. In the coming years, and decades, we should see higher prices.

    It’s not the end of the world folks, just the end of your world. Look at Stephen Hawking. Gone, never to return again. Did the world end? I am typing this, and you are reading, this, correct?

    Well, same applies to you and me, as well. We can be gone, the system will continue. That’s the main lesson we all have to learn. But that was true anyway, correct. Whatever happens in the year 2050 or 2100 or 2150, you personally were never going to be around to witness it.

    • xabier says:

      Dolph, they can be kept alive for longer than you can stay sane…. 🙂

    • Ed says:

      dolph, I have at least a 40% of making it to 2050.

    • kulmthestatusquo says:

      dolph, you are a doctor. You should know better – few people with ALS live for 5 decades. I believe “Stephen Hawking” is the longest survivor of ALS in human history.

      The real Stephen Hawking probably died around 1990, the time of his first ‘divorce’. For whatever reason the E.ld. ers needed him so a double served that duty till 2006 when his second ‘divorce’ took place. A third Stephen Hawking lived until yesterday.

      He was diagnosed in 1963, and probably died around 1990, 27 years with the disease. He did quite well. And since he died long ago, the world had nothing to do with him.

    • doomphd says:

      thanks for restating the obvious, dolph. if we did have a sudden collapse, how would you know? how would you distinguish local from regional effects? word of mouth? rumors?

  2. Fast Eddy says:

    But the MSM is not faking GGG WWWWing … hahahahaha

    • Name says:

      You still don’t understand, that GGG WWWWing warnings are based od DECADES of science, not on MSM reports. There is no solid science that renewables can power industrial civilization. It is just faith. But G W is studied very long time. The concept of it reaches 19th century.

      • djerek says:

        Because temperatures were rising at that time before they peaked in the aughts and teens in the early 20th century before cooling, which showed things were obviously cyclical. The cyclical paradigm remained the mainstream understanding until catastrophism emerged in the 70s and 80s.

        FYI most temp. records are still from that peak in the 1900s.

        • Fast Eddy says:

          Name — shall we start a list of things that were based on decades of science… that turned out to be false? You go first…..

          That said GGG wWW is NOT based on science… it is a f789ing ho ax… with the purpose of deflecting our attention from the real problem – that has NO solution — the end of energy — and the end of BAU….

          It is so f789ing obvious… only a f789ing donkey could not see it

          Remember Fast Eddy was a donkey too a year ago — so he knows how you donkeys feel

      • Fast Eddy says:

        Ya – I am drinking two glasses at least — of red wine tonight… because there is decades of science that tells me that it’s good for me!!!

      • Fast Eddy says:

        Recall how there was overwhelming evidence of WMD in Iraq…. heck it was so overwhelming that we trashed the entire country based on it!!!

        You would think Leo would have had the science… so why this?

    • I don’t know. Ever since we started using fossil fuels, we have been fighting a battle between depletion and technology. We almost lost in the World War I to Depression era, but then technology and a lot of debt saved us. We have been using technology and a lot of debt to string things along since then.

      I have no idea how this system works. If it uses some of the energy available within the oil sands, the cost could be quite low. (EROEI would be low as well, but that is a pollution issue, more than anything else.) One of the big issues is timing. This company is claiming 30,000 barrels a day of production. That isn’t much. We need a cheap, scaled up, source of energy, now. Another issue is full cost, when government taxes are included. A third issue is dependence on the world supply chain. If we start having problems with major suppliers, it could be a no go. And obviously, there is a question whether this technology really works as planned at scale. For example, does it depend on the availability of large quantities of fresh water, when such resources are not really available in many areas where oil sands resources are available?

      • Lastcall says:

        Also, the article is tagged ‘Sponsored Content’….mmm…IPO coming up?

        • Good point! Companies seem to have a way of overestimating what they really can do. There are breakthroughs, but they all seem to be slow to go through the many steps from theory to scaled up final products.

          • Harry Gibbs says:

            It is amazing the sorts of stories that people are willing to believe and investors are willing to invest in.

            “One of France’s richest families has taken a significant stake in UK Oil & Gas – the company that stunned markets after claiming it had found vast oil and gas reserves in South East England.

            “SCDM Energy, which is controlled by the billionaire Bouygues brothers, snapped up 5.03 per cent of UK Oil and Gas (UKOG), which is looking for oil in the Weald area near Gatwick airport.

            “Brothers Martin and Olivier are the sons of Francis Bouygues, founder of the Bouygues group which is one France’s largest corporations – with interests in telecoms, construction and real estate.

            “It was two years ago that UKOG said it had found billions of barrels of oil under Surrey and West Sussex and its find was dubbed ‘the Gatwick Gusher’.

            “But soon afterwards UKOG had to stress it was not clear whether there is any recoverable oil at all, leading some analysts to pour cold water on UKOG’s prospects…”


    • Pintada says:

      The article has an obvious lie, “It extracts over 99 percent of all hydrocarbons in the sand, generates zero greenhouse gases and doesn’t require high temperatures or pressures.”

      No reason to read further.

  3. Pingback: Our Latest Oil Predicament - The Energy Collective

  4. ur awesome chick

    (cut and paste the following text, spread it around…)

    Stefan Rahmstorf says our emissions must go down 100% in 20 years to stay under 2 C.

    James Hansen says 2 C = DISASTER

    Kevin Anderson says we have a 5% chance of success for staying below 2 C.

    We have a 95% chance of failing to stay below the disaster zone.

    Energy Prospects

    UC Davis Peer Reviewed Study: It Will Take 131 Years to Replace Oil with Alternatives (Malyshkina, 2010)


    At this rate, it’s going to take nearly 400 years to transform the energy system


    University of Chicago Peer Reviewed Study: predicts world economy unlikely to stop relying on fossil fuels (Covert, 2016)


    Solar and Wind produced less than one percent of total world energy in 2016 – IEA WEO 2017


    Fossil Fuel Share of Global Energy since 1990 – BP 2017

    Renewable energy ‘simply won’t work’: Top Google engineers


    Top scientists show why powering US using 100 percent renewable energy is a delusional fantasy


    IEA Sees No Peak Oil Demand ‘Any Time Soon’


    The Curse of Energy Efficiency


    • I agree that renewables don’t work.

      IEA doesn’t see peak demand, because it doesn’t understand how the system works. Peak demand is not a good outcome; it precedes collapse. It comes when there is too much wage disparity and governments cannot tax workers enough. It is an outcome of too much complexity.

    • JH Wyoming says:

      Losing 1% per decade, it will take another 86 years to get to 100% renewables and 0% FF. Good luck.

  5. Sungr says:

    The Myth of a Neo-Imperial China

    New Silk Road infrastructure projects could bring back a peaceful and prosperous Eurasia
    By Pepe Escobar March 14, 2018 5:15 PM

    The geopolitical focus of the still young 21st century spans the Indian Ocean from the Persian Gulf all the way to the South China Sea alongside the spectrum from Southwest Asia to Central Asia and China.

    That happens to configure the prime playing ground, overland and maritime, of the New Silk Roads, or the Belt and Road Initiative (BRI).

    The epicenter of global power shifting East is ruffling feathers in some US political circles – with a proliferation of parochial analyses ranging from Chinese “imperial overstretch” to Xi Jinping’s Chinese Dream provoking “nightmares.”

    The basic argument is that Emperor Xi is aiming for a global power grab by mythologizing the New Silk Roads.

    The BRI is certainly about China’s massive foreign exchange reserves; the building know-how; the excess capacity in steel, aluminum and concrete production; public and private financing partnerships; the internationalization of the yuan; and full connectivity of infrastructure and information flows.


    • Dan says:

      Dear Leader Xi is going to soon learn that not everybody wants to be Chinese and then he’ll have to go to war with those people and kill them just like we’ve had to do when they didn’t want to be americans.
      Believe it or not poor people don’t appreciate being stolen from.

    • JH Wyoming says:

      China’s making all the right moves to position themselves to be the dominant country to replace the US. The exchange they’ve set up for oil transactions is a major milestone for them to build on the value of their currency towards becoming the ‘Yuan-dollar’, potentially over not many years completely replacing the Petro-dollar.

      And what they are doing with the Silk Road is genius. Those areas need China to move commerce faster and on a bigger scale while China needs their resources. It’s a perfect match. The global growth from that alone will be massive!

      • Assuming China can keep from collapsing! China’s energy needs are fantastic. With all of the debt, it needs to keep growing. It is easily the biggest energy consumer in the world.

  6. Baby Doomer says:

    Trump’s pick for National Economic Council is a CNBC host who gives bad financial advice

    Kudlow does not have either a graduate or undergraduate degree in economics and has not written scholarly papers on the subject.

    Kudlow argued in 2002 that invading Iraq would create an economic boom in the United States.

    In December 2007, while the Great Recession was beginning, Kudlow insisted “there ain’t no recession” and the “Bush boom continues.” Kudlow wrote, “There’s no recession coming. The pessimistas were wrong. It’s not going to happen. At a bare minimum, we are looking at Goldilocks 2.0.”

    In July 2008, seven months into the recession, Kudlow was still arguing that there was no recession or housing crisis, arguing that America was “in a mental recession, not an actual recession.”

    In September 2008, Kudlow argued that lower oil prices would “make it much easier for people to pay their mortgages on time,” thus abating the growing credit crisis.

    Kudlow said that he was “grateful” that the “human toll” from the Fukushima nuclear disaster was worse than the “economic toll.” He later apologized.

    In a rant about President Barack Obama’s first 100 days, Kudlow accused the former president of declaring “war against investors, businesses, and entrepreneurs,” and “replacing the rule of law” with “political decisions.”

    Kudlow called the “higher income inequality” of the modern era a “falsehood” and denounced Obama’s “tired, banal, and boring” policy focus on the issue.

    Kudlow argued that the country began stress tests on banks in 2009 because the Obama administration needed a villain.

    Kudlow suggested Trump’s “protectionist” trade policies could cause an economic depression but endorsed Trump anyway.


    • I don’t have a degree in economics either.

      • John Doyle says:

        You are vastly better off without an economics degree! That way you don’t have to unlearn so much before understanding arrives. Mainstream academic economics is a mishmash of options that don’t wear well in real life.

    • JH Wyoming says:

      I saw Kudlow on CNBC when Obama was prez, and he said, “All we need is more growth. I don’t understand why this administration doesn’t understand that. It’s so simple.”

      We all know how important growth is for the financial system of loans, but actually getting growth is not so simple as realizing it’s needed. He acted like it was a simple thing to make happen. Tell us how Kudlow and don’t say QE.

    • Fast Eddy says:

      Ya but he’s a heavy cocaine user… he understands the vicious circle required to keep the hamster running ever faster….

    • JH Wyoming says:

      Wow, that tiny island nation has more guts than the US. While the US is running scared not daring to do anything to anger the big bear, the UK is getting tough on them. Reminds me of a YouTube video I saw in which a small female cougar fights off a big grizzly bear trying to get to her cub, while the US is like a T-Rex cowering behind a thicket of bamboo.

      • Bones says:

        Yep all the UK needs to do is stop buying Russian gas. When they do that I may take them seriously.

        • Tim Groves says:

          Absolutely. Then they could kill several birds with one stone: assert their independence, deprive the Ruskies of cashflow, shrink their carbon footprint, save on welfare by letting the old, sick and poor freeze to death, become a world leader for the new age of austerity….

          • Fast Eddy says:

            Once again… all Putin needs to do is turn off the gas tap for a week….

            Isn’t it strange that he doesn’t hint at that?

            • xabier says:

              He doesn’t have to: when the British actually had a world-class Navy, they didn’t refer to it at all – everyone knew the score.

          • doomphd says:

            The Brits, always at the forefront of progress.

  7. Kurt says:

    I’m bored again. Could someone please rip on Elon.
    You know, the guy who makes cars, spaceships, tunnels, and stuff. Also, he dated Amber Heard. He’s a visionary. Also, he works like, really hard. Unlike all the slackers on ofw. I’m looking forward to the mars stuff. A lot of people on this site just don’t get it. Elon is the future. Of course, I’ve been predicting economic collapse during the summer of 2020 for several years now so maybe I don’t get it.

    • JH Wyoming says:

      I’ve read stuff in which Elon understands collapse is a big risk going forward, and that’s also substantiated by his position on populating Mars, however far fetched that may seem at this juncture. Guess he just leads his life doing what he can regardless of how things turn out. I thought putting a car in space was pretty funny. The car has a placque on it that reads, Made on Planet Earth, which is great as long as anyone finding it later can read English.

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