Oil prices and recessions

[Mr.Phips]

Here is an interesting article and chart that shows how every recession since 1948 has been preceeded by an large increase in oil prices. 

http://www.econbrowser.com/archives/2011/01/oil_shocks_and_2.html

Since May 2010, oil prices have jumped 39%. 

A recession has followed every oil price increase of 37% or more. 

[Southern Senator North Carolina Yankee]

And from what I have heard, they aren't done rising, not by a longshot. Only a long sustained rebound in the dollar could probably put a ceiling on prices at this point. And that would only be produced by something in Europe occuring. Which would likely put us into contraction anyway. Interesting situation we find ourselves in.

[Mr.Phips]

Yeah, pretty neat correlation.

If you want to ask Hamilton any questions, I can ask him, I might get to see him in a week or so.

Ask him if he thinks the current increase in oil prices will lead to a recession this year or early next. 

[The Economist]

It seems reasonable - oil prices are hugely interconnected with economic health. When they go up, the economy might suffer as a consequence since gas prices are one of the factors reducing disposable income.

[Ban my account ffs!]

isn't it quite obvious?  Oil drives our entire economy.  All of it.  Every single last bit.  I challenge you to think of the things in your life that involve absolutely no oil at all.  I doubt any of us could come up with anything much.  Even the PVC solar panels providing renewable energy to your home used oil to be made.

I try not to be a doom and gloom type of guy... but there are some curious things going on.

What we know:

-We know that the OPEC nations are vastly overstating their oil reserves, likely due to policies 20 years ago that put limits on how much oil you could sell based on how many reserves you had.  Like dominoes, the stated oil reserves in these nations began to double.. most often overnight.. with no evidence of such oil "discoveries" offered to anybody.
-We know that oil production typically falls during global recessions as demand eases thanks to lower economic activity.
-We know that despite a very strong global economy in the years 2006-2007, oil production plateaued and fell from its 2005 output levels... and levels rose to 0.2% over the 2005 peak during the price shocks of 2008.

There is a chance we may have actually reached the peak.  Of course we'll not know for quite a while... but I sincerely doubt that global oil production will rise much above 2005/2008 levels despite strong signs of global economic recovery. 

If that is indeed the case, then we have likely reached what the professional doomsday guy Michael Ruppert calls "the plateau"... this is where economic growth slams to a halt when oil prices spike to never before seen levels.  There is strong recession, and in response, oil prices plummet.. in response to that, the economy begins to pick up again.. but before it can truly gain any steam compared to the prior business cycle peak, prices spike again, and the economy goes back into contraction.  And on it goes... until one cycle, people simply can't afford to fill their gas tanks anymore... and the economy completely collapses.

I hope he's wrong.  I mean.. I'm not going to plan my life around some impending doom... but you also won't find me buying a sprawling McMansion on the outskirts of Vegas or Phoenix, either.

Then again.. there is hope.  A new technology has recently been tested and a power plant is being constructed in spain that allows solar energy to work at night.  How?

You have collection mirrors that concentrate the heat of the sun.  This heat is then indirectly exposed to a salt mixture that melts at a temperature of about 1400˚F.  The melt temp is so high because the salt mixture is relatively cheap and easy to come by.  More expensive, harder to get salts can melt at temps as low as 300˚F.  (such technology is going to be tried in Arizona).

This molten salt is then stored throughout the day and is then released into pipes at night to heat water and produce steam, thus producing electricity.  The technology as is means that only 7% of the solar energy is lost in converting it into molten salt and then boiled water.  The company behind the technology is so sure about this working really well that they're already building a 2nd plant.

Another firm in Arizona is going to build a 280 MW plant that uses similar technology.  While the solar "farm" will be huge, the plant will produce about the same amount of electricity as a typical coal plant.

[The Economist]

I have a question about your comment on peak oil. Isn’t it true that peak oil has always been revised further down the road, ie, we keep saying peak oil will arrive now in fact it’s been pushed down the road continuously? In particular, we’ve seen oil discoveries in Brazil, the Black Sea, to name a few places. I do not disagree oil is a finite resource (nor do I, to digress slightly, disagree with the need to transition to a renewable energy based economy to avoid the issues you outline with the doomsday scenario).

In a sense, I’m asking what makes you think we’ve reached peak oil.

[RFQ]

Reducing dependency is the only option... but even when we have a great resource North of the Border (Tar Sands) we fight it.  Environmentalists would rather we boat it over from Middle East then pipe it down.

[Ban my account ffs!]

Reducing dependency is the only option... but even when we have a great resource North of the Border (Tar Sands) we fight it.  Environmentalists would rather we boat it over from Middle East then pipe it down.

Oil from the middle east pollutes the air.. but it doesn't destroy vast tracts of land like mining tar sands.  Also, Middle Eastern oil is light, sweet crude... akin to burning a nice clear oil compared to the crap that comes out of your engine on oil change day.

From an environmental perspective, it makes sense to support Middle Eastern oil over Canadian tar sands, because the environmental effects are much much less.  Of course most environmentalists would just as soon phase oil out as quickly as possible and get energy from renewable resources.

I have a question about your comment on peak oil. Isn’t it true that peak oil has always been revised further down the road, ie, we keep saying peak oil will arrive now in fact it’s been pushed down the road continuously? In particular, we’ve seen oil discoveries in Brazil, the Black Sea, to name a few places. I do not disagree oil is a finite resource (nor do I, to digress slightly, disagree with the need to transition to a renewable energy based economy to avoid the issues you outline with the doomsday scenario).

In a sense, I’m asking what makes you think we’ve reached peak oil.

I don't think we've reached the peak yet... but as far as prices go.. the era of cheap oil is already over.  Even though oil production may rise in the coming years, it will most likely rise slower than the demand for it.  But the price shocks are likely not to be as bad because people will say "well.. oil is still increasing... we should be okay"

It won't be until we know for sure that oil production is in decline that things will really get bad.  That's because then we'll panic. 

Also, keep in mind that even though the discoveries in Brazil and the Black Sea and North Dakota are significant... they are a drop in the bucket compared to total global oil usage.  If the U.S. alone were to pump every last drop of recoverable oil (with today's technology) from the Bakken shale formation in ND, the largest oil find in American history... it would still only give us 6 months of oil at current rates.  And that's just in the U.S.

No currently viable or soon to be viable energy source will come close to the energy intensity that oil gives us.  Not coal, not natural gas, not renewables... and while nuclear energy is very efficient... the uranium we need is a very finite resource and won't last all that long if we start building nuclear plants all over the place.

We're simply going to have to use less energy to get by. 

[dead0man]

If you care about the environment (fewer gas guzzlers, faster movement to other forms of energy) or driving safer (fewer large cars on the road, fewer cars on the road period) this is good news.

[CARLHAYDEN]

Here is an interesting article and chart that shows how every recession since 1948 has been preceeded by an large increase in oil prices. 

http://www.econbrowser.com/archives/2011/01/oil_shocks_and_2.html

Since May 2010, oil prices have jumped 39%. 

A recession has followed every oil price increase of 37% or more. 

Interesting data and analysis.

Thanks for posting it.

[RFQ]

Reducing dependency is the only option... but even when we have a great resource North of the Border (Tar Sands) we fight it.  Environmentalists would rather we boat it over from Middle East then pipe it down.

Oil from the middle east pollutes the air.. but it doesn't destroy vast tracts of land like mining tar sands.  Also, Middle Eastern oil is light, sweet crude... akin to burning a nice clear oil compared to the crap that comes out of your engine on oil change day.

From an environmental perspective, it makes sense to support Middle Eastern oil over Canadian tar sands, because the environmental effects are much much less.  Of course most environmentalists would just as soon phase oil out as quickly as possible and get energy from renewable resources.

-------------------

The new processes out of the tar sands are much more efficient today, yes it is a heavier oil and causes more greenhouse gases to get out of the ground vs middle east oil but the delivery process of getting the oil to market vs piping must be considered.  Also, would you rather provide funds to a friendly neighbor in Canada or line the pockets of middle east companies ... keep in mind how many billions or is it trillions of dollars we spend sending our troops and resources over there.  How much damage to the environment takes place to mobilize our troops, planes, ships to the middle east and how much fuel is burned into the environment in the process.  No comparison.

[The Economist]

@ Snowguy716 – you’re probably right, but incidentally speaking on the era of cheap oil, is the price of gas going up because of the wild speculation or because of supply & demand constraints?

I’m not entirely sure the current price of oil is because of supply and demand entirely … it sounds more like there’s a tie in between the oil stock bubble that we see periodically and the price of gas.

Or if you want, more nefarious explanations like the disruption of oil production in areas like Iraq.

[RFQ]

Obama says Canada a "partner" in U.S. plans to make itself less dependent on oil
Canadian Press, 21:36:19.812 GMT 30-Mar-2011
By Lee-Anne Goodman
(Canadian Press) -- WASHINGTON -- U.S. President Barack Obama called Wednesday for a one-third reduction in American oil imports by 2025, describing Canada as one of his country's energy partners as he tackled an issue that has dogged the United States since the 1970s.

[Ban my account ffs!]

@ Snowguy716 – you’re probably right, but incidentally speaking on the era of cheap oil, is the price of gas going up because of the wild speculation or because of supply & demand constraints?

I’m not entirely sure the current price of oil is because of supply and demand entirely … it sounds more like there’s a tie in between the oil stock bubble that we see periodically and the price of gas.

Or if you want, more nefarious explanations like the disruption of oil production in areas like Iraq.

Way late on a reply to this:

Sure, there is certainly speculation.  But the only reason there is significant speculation in oil is because people are hedging their bets on the peak coming sooner than later.

In 2005 and again in 2008, we were pumping oil as fast as we could and still the supply was flatlining.  Oil production peaked in 2005, shrunk in 2006, and flatlined until in 2008 there was a small rise... despite significant growth in demand over the 2005-2008 period.

Like I said before:  There is no currently viable alternative to oil that will be anywhere near as efficient.  The energy return on investment for oil is often around 50 to 1.  That means oil companies are getting 50 units of energy for every unit of energy they put in when pumping the stuff from the ground.  Nothing else comes anywhere near that.  Coal is a pretty good return on investment... but is still maybe 1/4 to 1/3 the efficiency of oil.  It only gets worse as you go down the line of nuclear, solar, wind, etc.  You could say hydroelectric is very efficient... but it isn't practical on the scale we would need it.

We will simply have to use less.

One very important part of the process will not be having people disperse into the country-side to be happy hippies cultivating their organic farms with big cheesy grins on their face.  It will mean people will mostly stay put.  They'll have to dig their heels in and make the situation better from where they are.

Cities will gradually become denser.  With that, mass transit will be used more because of increased congestion and oil/gas prices.

The suburbs will still be there.  They might not be expanding outward very much anymore... but I think people will help temper the hikes in energy prices by designating open land as community gardens.  A large community garden can feed hundreds of families with all of their fresh produce needs throughout the summer.  That's a lot of trucks off the roads and a lot of saved trips to the supermarket.

Electric cars will likely become ubiquitous... but gasoline fueled or even natural gas fueled cars will still be very common.. especially in hybrid form for those that must travel longer distances.  The electric cars will be used primarily for day-to-day use.

We aren't going to power the needs of Americans, even if we become more efficient and reduce energy usage, completely from renewables as those technologies exist today.

We simply cannot cover the entire great plains with windmills or the entire deserts with solar panels.  While we are finding ways to make solar energy consistent with energy storage technologies... wind power remains a fledgling technology that likely will not become more than supplemental energy lest we make a major breakthrough.

With wind, our electricity production is at the whim of the weather... and when we need the electricity most... on those frigid calm mornings of mid-winter... those turbines will be still.  Even more, a spinning windmill in frigid weather has led to many malfunctions and catastrophic failures of windmills.  This poses a danger to anybody who travels or lives near these behemoths.  When a machine that is 400 feet tall with rapidly spinning blades comes crashing down due to brittle materials caused by cold weather... it does not bode well for Farmer Joe whose house is 50 feet away.

So we'll have to develop natural gas, coal, and drill for oil.  We'll have to research as much as possible and make new forms of energy viable.

But I'll tell you this:  If we follow the Republican energy policy of "drill, baby, drill"... the doomsday will only come sooner and be much worse.

[t_host1]

A deal with Canada/tar sands, a 2B loan to Brazil for development and yet a planned reduction of one third in imports.

Our president said, just recently, that he has produced more oil than anyone before.

Crude is being traded at a discount between drillers & refiners.

There is a storage problem – tanks are full, tankers (ships) full & stowed.

No new refineries

Consumption per person, in gallons, is down.

Traders move perceptions not physical crude, which was known as brokering.

99.9 percent of the consuming public having no control of it – who did you vote for?

Making cents of it all…?   Go figure.   


Seems to me recessions are more about not being prepared for the required slow downs, which keeps prices stable, increases currency value.

Depressions are/is dilution – non-in kind trading inflates value that trades out to 0, which is where we are.

Solution – there is no choice, stop the dilution.   


 

[opebo]

A deal with Canada/tar sands, a 2B loan to Brazil for development and yet a planned reduction of one third in imports.

It isn't really an 'import' if it comes from a non-muslim country, now is it?  Particularly these close allies.

[t_host1]

The US President has now implemented an inquiry as to why? - you're paying 110% more for fuel under his transformation plan.

... it has now been 6 months of extraordinary examination, WH briefing today says, "We're pumping all the oil we can - making sure everyone can have all that you can afford".

a reporter asked. 'are you saying that the investigation found no collusion or price gouging?

briefer, ' the President found nothing wrong with the repor... aah.. I mean... ah... the report is incomplete at this time and that... ah  ahum... the green initiatives are well underway.