Tag Archives: oil forecast

Oil and the Economy: Where are We Headed in 2015-16?

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The price of oil is down. How should we expect the economy to perform in 2015 and 2016?

Newspapers in the United States seem to emphasize the positive aspects of the drop in prices. I have written Ten Reasons Why High Oil Prices are a Problem. If our only problem were high oil prices, then low oil prices would seem to be a solution. Unfortunately, the problem we are encountering now is extremely low prices. If prices continue at this low level, or go even lower, we are in deep trouble with respect to future oil extraction.

It seems to me that the situation is much more worrisome than most people would expect. Even if there are some temporary good effects, they will be more than offset by bad effects, some of which could be very bad indeed. We may be reaching limits of a finite world.

The Nature of Our Problem with Oil Prices

The low oil prices we are seeing are a symptom of serious problems within the economy–what I have called “increased inefficiency” (really diminishing returns) leading to low wages. See my post How increased inefficiency explains falling oil prices. While wages have been stagnating, the cost of oil extraction has been increasing by about ten percent a year, described in my post Beginning of the End? Oil Companies Cut Back on Spending.

Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:

  • The amount consumers can afford for oil
  • The cost of oil, if oil price matches the cost of production

The fact that oil prices were not rising enough to support the higher extraction costs was already a problem back in February 2014, at the time the article Beginning of the End? Oil Companies Cut Back on Spending was written. (The drop in oil prices did not start until June 2014.)

Two different debt-related initiatives have helped cover up the growing mismatch between the cost of extraction and the amount consumers could afford:

  • Quantitative Easing (QE) in a number of countries. This creates artificially low interest rates and thus encourages borrowing for speculative activities.
  • Growth in Chinese spending on infrastructure. This program was funded by debt.

Both of these programs have been scaled-back significantly since June 2014, with US QE ending its taper in October 2014, and Chinese debt programs undergoing greater controls since early 2014. Chinese new home prices have been dropping since May 2014.

Figure 1. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Figure 1. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

The effect of scaling back both of these programs in the same timeframe has been like a driver taking his foot off of the gasoline pedal. The already slowing world economy slowed further, bringing down oil prices. The prices of many other commodities, such as coal and iron ore, are down as well. Instead of oil prices staying up near the cost of extraction, they have fallen closer to the level consumers can afford. Needless to say, this is not good if the economy really needs the use of oil and other commodities.

It is not clear that either the US QE program or the Chinese program of infrastructure building can be restarted. Both programs were reaching the limits of their usefulness. At some point, additional funds begin going into investments with little return–buildings that would never be occupied or shale operations that would never be profitable. Or investments in Emerging Markets that cannot be profitable without higher commodity prices than are available today.  Continue reading →

IEO 2011: A Misleadingly Optimistic Energy Forecast by the EIA

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The EIA published International Energy Outlook 2011 (IEO 2011) on September 19, showing energy projections to 2035. One summary stated, “Global Energy Use to Jump 53%, largely driven by strong demand from places like India and China.”

It seems to me that this estimate is misleadingly high. The EIA is placing too much emphasis on what demand would be, if the price were low enough. In fact, oil, natural gas, and coal are all getting more difficult (and expensive) to extract. Prices will need to be much higher than today to cover the cost of extraction plus taxes countries choose to levy on energy extraction. The required high energy prices are likely to lead to recessionary impacts, which in turn will cut back demand for energy products of all types.

We live in a finite world. While it is true that huge resources of oil, natural gas, and coal are still theoretically available, we are starting to reach practical limits regarding extraction at prices that do not lead to economic contraction. Continue reading →

Steven Kopits: Oil, the Economy and Policy

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Steve Kopits, Managing Director of Douglas-Westood consulting firm, made a presentation called “Oil, the Economy, and Policy” to the US House of Representatives Energy Subcommittee recently that I thought was interesting. I this post, I explain the presentation a bit and give my views related to it.

I was impressed that Steve was able to make a presentation to this group. (Steve later clarified that his presentation was really the subcommittee staffers–but they are very important too. They are often the hands-ons people in drafting legislation.) He sent me the presentation by e-mail; I am not aware that the presentation is available online. Steve recently wrote a post called An Oil Shock in 2012? (published by ASPO-USA) that covers part this material, if readers would like more of his explanation.

I find the historical information slides in the first part of  the presentation interesting in and of themselves. I am not sure I would come up with the same forecasts of future production as shown in this presentation, though–it seems to me that they are on the optimistic side. There is a question of what forecast a person should show to a committee such as this congressional committee: even a fairly high estimate is likely to shock the committee, and too low an estimate is likely not to be believed. Many of us, in a similar circumstance, would offer our most optimistic view of the future. It may be that Douglas-Westwood is shading its estimates a little on the optimistic side, too–I don’t know.

Slide 1

Continue reading →