OPEC has declined to raise its quotas, causing the price of oil to jump back towards $100. A few years ago, OPEC ministers were worried that prices were heading towards $50; they feared that this would lead to the kind of demand collapse that ravaged OPEC finances in the mid-eighties. Now the FT says price hawks, led by Venezuela, were arguing that "a price of $100 a barrel was fair." Undoubtedly, if the price crosses $100, $125 will start to look more than just.
To be sure, the other members are less aggressive; the FT reports that Abdullah al-Badri, Opec’s secretary general, said: “There is no reason whatsoever for prices to go up to $100.” Nonetheless, they caved to the hawks, apparently because last week's price drop, which was based on expectations of a quota increase, scared the more moderate producers.
As in the late seventies and early eighties, these producers have become extremely dependent on expensive oil to support their budgets. Hawkish member Venezuela is hawkish in part because Chavez's diversion of investment funds to social spending, and his creative nationalization of oil fields, have caused Venezuelan crude production to fall. Should the price of oil fall back towards historical level, the Venezuelan boom will not only bust, but leave the Venezolanos worse off than they were before. Most of the other members are in similar, if less dire, straits; they are spending their windfall, not saving it, and when (if) the price falls so will the government's income and popularity.
Too, the lengthy price run-up has not just made them more dependent on high oil prices; it is also making high prices seem less scary. After all, demand remains robust, and world economic growth is still okay(ish). But this may be a false sense of security. Human beings are programmed to continually reevaluate the probability of an event based on recent events. Emotionally, we become more comfortable with situations the longer they persist, even if there is no rational reason to believe that the underlying risks have changed--indeed even during events such as stock market bubbles, where the risks get worse the longer the situation endures.
OIl prices are highly inelastic over the short run; people have to drive to work and heat their homes even when the price of oil rises, so they buy the oil and gasoline, and cut other spending from their budget. Over periods of years, however, conservation becomes a priority in making all sorts of purchase decisions: they opt for smaller, better insulated houses, more efficient cars and appliances, shorter commutes. Importantly, these changes are extremely persistent. The durable goods may last a decade or more, cutting into the demand for your product. And the memory of high prices is also persistent, affecting purchasing decisions even after the price starts to come down. The result, in the mid-eighties, was that prices did not decline gracefully; after years of run-up, they simply imploded, taking the OPEC members' budgets with them. There's evidence that Americans are starting to get serious about conservation--my aunt, located deep in the heart of red state America, just traded her SUV for a Prius. Abdullah Al-Badri may be more right than he knows
Of course, there's another explanation for OPEC's behavior, one that is increasingly worrying energy experts: that they aren't increasing production because they can't. High prices like this are usually accompanied by rampant cheating, but the overall level of leakage seems to be pretty modest. If that's the case, a few years from now, we may think that $100 a barrel sounds pretty fair ourselves.
Of course what America does in the next few years with energy conservation is only one part of the equation. China may be a bigger part. As it rapidly moves towards being a car culture, high oil prices could influence both long-lived infrastructure decisions and the nature of the automotive culture in China. In this respect high prices now might be a long-term benefit to China's economy.
[P]eople have to . . . heat their homes even when the price of oil rises
That this country still uses diesel ("home heating oil") to heat buildings more than three decades after the Arab Oil Embargo is one of those things that shows that government energy policy doesn't work.
There are lots of way to heat buildings that use fuels less suited for transportation; the continued use of diesel would be a classic example of "market failure" if it weren't for the fact that the diesel is supplied by closely-regulated government-established utility monopolies. Or that fuel tax structure that makes using diesel to heat a home cheaper than using it for transportation.
But the real classic case of government failure was the establishment of a Home Heating Oil Reserve, which amounted to a government policy to encourage using petroleum to heat homes.
I'm pretty sure your last paragraph is the most important one. The consensus among oil types here in Houston seems to be that of all the OPEC members, only Saudi Arabia has any spare capacity to speak of. In this case it seems Saudi Arabia gave in to the other members, maybe for future political capital, who knows. But the bottom line is that in the end it is Saudi Arabia's decision.
Here's a brief article illustrating slow movement on the automobile front. Car sales up 5.5% on last year, truck and SUV sales down 7.4%, with larger gains among the more fuel-efficient cars. As you say, the long-term elasticity is definitely much greater than short-term.
2007 is going to be a record for fuel economy, beating the previous record holder of 1987. 26.4 MPG, up 1 MPG from last year; 1987's record was 26.2 MPG. That translates (with constant miles driven) into about 4% less fuel used for the 2007 fleet as opposed to the 2006 fleet, building upon previous gains.
It is better to light a single candle than to curse the darkness.
In this case the candle is lit - by burning less petroleum.
But all those who blather about the Venezeulan 'dictator'
never adopt the only useful approach to reining him in. Cutting our dependency on his oil.
Tom Friedman is generally an idiot, but he has repeated this argument over and over. Why are we
sending gobs of money to people who fund all those
nasty terrists?
OPEC members buy a lot of goods and services from places like Europe. A $100 does not go very far in Europe these days. Bernanke & Co. are feeding an inflationary spiral and devaluing the $ in the process. Wall Street may be happy with the Fed's bailout of imprudent lenders, but the rest of us, including OPEC producers, are paying the price.
Sooner or later the transportation sector is going to demand more money for moving goods from ports of entry or dmoestic factories to the consumber. Sooner or later workers are going to demand more money for coping with increased costs of those good, or their own transportation and energy needs.
The case of home heating oil is a good illustration of the relative inealsticity of oil consumption. I heat with oil because the house I bought has an oil heating system that is about ten years old. Clearly the system has a lot of years left in it. How long would it take me to recoup the cost of tearing out my oil heating system and installing a new one? What new system should I install? Certainly not an electric one given the near certainty that electric prices will rise either due to the increased cost of the oil that some power companies use to produce electricity or due to regulatory requirements that electricity producers reduce their greenhouse gases. Certainly not wind or solar because they are not available on calm or cloudy days.
Oil is one of many sources of energy. Its chief competitor, gas, is also a petroleum product. NIMBYism makes it very difficult to either bring LNG into this country or to build gas pipelines. No matter what the virtues of nukes, NIMBYism will defeat schemes to build siginificant amounts of new nuclear plants. Wind and solar are great for the environment but cannot serve as a primary energy source because of their volatility.
The fact remains that oil will be a primary source of energy for a long time because its flexibility, ease of transport, and existing infrastructure make it very competitive even at higher prices. That could change if we really have passed a peak in petroleum supply, but one should be a little skeptical considering how much of OPEC's production is by state-owned companies that invest very little in maintenance.
bottom line is that OPEC is doing us all a favor by raising prices. It forces people to think about what stupid ordinary politics is doing to our economy.
catclub,
'cause when we send them those gobs of money, they send us nice stuff. We call this "trade".
I like being able to drive to work each day. Beats being unemployed. So I buy gasoline and put it in my car.
We don't really advance our knowledge by forgetting or ignoring all the simple and obvious stuff. Most people I know will try to get efficient devices, 'cause it saves them money. Those people who aren't being as efficient as you'd like usually have a reason for it. Driving two or three Priuses to a kids soccer game isn't actually more efficient than driving one SUV or minivan, especially when you factor in the labor of the additional driver(s).
Even if we established some way to only buy oil from "good countries", the market distribution would just shift around. Other countries would buy up oil from the "bad" places, and we'd buy the oil that those other countries used to.
If you have a better solution to most people's daily actual needs than oil, I'm sure they'd be happy to have it. But in the meantime "you drive an SUV, you support terrorism! For shame!" isn't really helpful.
Also in the oil industry, and as previous poster Amber said, the consensus is that the countries that make up OPEC simply can't increase production very much. The really big question, is what this means. Does it mean that a general period of underinvestment in oil production capabilities has left a temporary shortfall in current production? If so, then the situation is likely to rectify itself in 5-10 years. On the other hand, if it means that the OPEC nations actually have discovered less oil than they publicly state, then the current run up in prices is just the beginning of a long process of oil becoming a scarcer commodity than in the past. In this case, it is likely to cause economic problems for 20+ years rather than the 'short' 5-10 years caused by underinvestment. There are very strong reasons to think that the OPEC nations have in general over stated their reserves for political purposes, so it will be interesting to see how this plays out in the coming years.
bad policies
quotas
peak production
independence from terrorist states
...
hmm
let's just say that I am skeptical myself. But maybe OPEC is not? We do not believe in this type of science. But maybe OPEC is envisioning... a certain club, Pig-ou?
What would a CO2 tax club mean for OPEC.. all customers artificially pushing demand down?
OPEC must be as confused as commodity traders are.
One one hand - this, a demand curve shift, would lead, in theory, to lower production and lower prices. This effect would be furthered by the fact that there are bad policies in place (aka there are policies in place). We would start changing these policies. Home land security is even more connected with the middle-east than before. We, our cars & Co, are getting more efficient. Demand can indeed decrease (at least in rich areas).
On the other hand - we are for sure closer to a peak than in the 80s. A supply curve shift?
Of course OPEC feels the pressure (more than say Russia with its "gas"). It seems as if they are getting ready for lower demand and supply?
Either way - everyone will want to milk the cow until she is dry. A race against nature that trades in another currency.
Jim
There's a dark and a troubled side of life
There's a bright, there's a sunny side, too
Tho' we meet with the darkness and strife
The sunny side we also may view
[cho:] Keep on the sunny side, always on the sunny side,
Keep on the sunny side of life
It will help us ev'ry day, it will brighten all the way
If we'll keep on the sunny side of life
The storm and its fury broke today,
Crushing hopes that we cherish so dear;
Clouds and storms will, in time, pass away
The sun again will shine bright and clear.
Let us greet with the song of hope each day
Tho' the moment be cloudy or fair
Let us trust in our Saviour away
Who keepeth everyone in His care
Jim --
The fact that there are any oil heating systems that are only "ten years old" is exactly the government failure in question. Heating oil should be dying a natural death of attrition because any competent government energy policy would have ended new installations of such systems thirty years ago.
It is very hard to substitute natural gas, coal, uranium, gravitational potential of water, wind, and solar for refined petroleum vehicle fuel, while it is relatively easy to substitute natural gas or electricity produced by the other methods for refined petroleum when the purpose is the heating of fixed installations. So competent policy would have actively discouraged use of petroleum for anything other than transportation. In association with the successful effort to severely reduce the use of petroleum for electrical generation, we'd have collected all the low-hanging fruit of petroleum conservation.
(NIMBY is, of course, merely a mode of of government failure.)
Mr Pottisch
The estimate from a case study on the wiki site you linked gives an price of about 80-90 us cents per kwh (for wholesale cost), in a benign environment (australian latitude and dry climate) I have the most expensive residential electricity in the US at 20 cents per KWH. Since home heating oil primarily in new england and mid atlantic i'm assuming Mr Linnane is there with electricity closer to the nat average of 15-16 per kwh and a more adverse latitude and climate than the solar case study.
And anecdotally, wind turbines have been opposed and permits have been denied in new england and mid atlantic coastal communities at both the wholesale and personal homeowner level.
the tech is not there yet; solar pv requires a materials breakthrough; the physics is pretty well researched. (0.3-0.7 V per PN junction, depending on doping and substrate). the solar collector needs such a breakthough as well, because we are very comfortable w/ thermodynamics.
Of course if the price of fossil fuels that drive the marginal cost of electrity goes up by another factor of three ($300 / barrel) then you got a business case.
Mr Pottisch one more link for you, if you please
These guys are very pro solar, but track that the price index for solar has risen by about 12% in Us dollars over the last three years. (and also say that the price need to come down by about a factor of three to be economic)
the delta was only 3% in euros though, so the us number definitely has some exchange rate effect. plus, since the euro price per watt has declined over the last few months, there may have been some technical progress.)
Kenny
My wikipedia link merely served to show that when it comes to solar thermal solutions - you can cope with cloudy days. But I made a mistake and linked to thermal energy and not thermal heating. My bad.
Here is a paper from the US Department of Energy on Solar Water heating.
As you can see - the US Government claims there is only on instance were we can confidently claim that one source is cheaper. Natural gas for so called retro installations. BUT that is before the Pigou club - right? I am curious to see how people will justify anything but solar AFTER the Pigou party?
The second comment of yours is regarding PV electricity. No - PV can not compete with nuclear and coal cost unless it gets the same subsidies - but then it too can here and now...
The price fluctuations in the PV industry are due to silicon shortages that computer chip manufacturers also experience every 2-3 years. The Euro-Dollar exchange rate does not help either. This is why Sun Tech Powers - the largest Chinese OEM - is now building a plant in the US. But all this applies one-to-one to Intel AMD & Co.
Hugo,
I'm not as dumb as I appear. Of course you can store the heat produced on sunny days. I'm speaking only from the point of view of the individual consumer's decision.
There are some problems such as, the further north you go, the shorter the days during winter, and winter is colder than summer, especially in the north. It has something to do with the amount of sunlight. The heating industry fairly accurately predicts consumer demand with the concept of heating degree days. A degree day is the number of degrees Fahrenheit the daily temperature falls below 65. There is a similar concept for air conditioning called cooling degree days, although I don't know how accurate it is since it does not take humidity into account.
Eastern Maine, where I reside, has just about 7500 heating degree days offset by 232 cooling degree days during a typical year. Central Florida has about 230 heating degree days and over 3400 cooling degree days. Would someone please ask taxpayers in Florida or Texas how much more they are willing to pay in taxes to have the federal government pay me to take out my oil burner and install a solar heating and storage system that will collect and store sufficient heat during Maine's short summer to last me through the winter?
Jim
Would someone please ask taxpayers in Florida or Texas how much more they are willing to pay in taxes to have the federal government pay me to take out my oil burner and install a solar heating and storage system that will collect and store sufficient heat during Maine's short summer to last me through the winter?
If sunny states, where it is economical today, cannot change then.. what? Then we cannot hope for the market and technology to make it eventually economical for the north. Smart policies would obviously take this into account and not build nuclear in Texas as is being discussed now but something else instead..?
And regarding the poor tax payers. I feel with them as I am a libertarian. But we are comparing this to what? To state subsidies that nuclear, coal, oil and the grid have received via tax payer money? Or are we comparing this to the $280 billion in tax subsidies to mainly the rich farmers in order to keep fruits and vegetables artificially expensive? Or are we comparing it to social security and education and and and...
How much do you think that emission reductions would cost the US compared to other costs?
And - are you aware that there are differences between positive and negative rights. Ie the right to have free education vs the right not to be killed?
If the ecology were a "right" - it would be a negative right compared to the positive economy? Do you understand what I am saying?
Mr Pottisch. The solar water heating system you describe looks interesting but it is an apples and oranges comparison to the original premise:
How can one replace an oil home heating system with an alternative?
BOE calc: The system in your follow-up takes water from 5-10 C to 50-60 C for use directly at that temperature. So very little loss due to transfer from one medium to another. Average daily use of 50 liters of water per person would take about 4 kJ, neglecting losses, and assuming water pressure is supplied as part of supplying the water. At 1736 Wh / m^2 (normal difuse radiant energy in Portland, ME) a double-door sized collector for the system should about to be able to keep up with average demand. So makes good theoretical sense to us this to obtain a method of obtaining hot water itself.
But to heat the *air* in the home you're looking at an order of magnitude less efficiency, because increased number of heat transfer boundaries, poor conduction of air, and increase parasitic losses due to required extra machines (i.e. pumps, both water and air types). If a radiator only had 140F water running through it, to most people that house in a New England winter is going to feel darn cold (180F-200F is normal). And I am pretty sure 50 l is absurdly low for system capacity, but can't find a typical value at this time.
Hugo,
AFAIK individual humans have, or should have, rights to be free from unecessary government. By the same token, one should have a right to relief from negative externalities caused by the actions of others; but it does not always follow that government action should be the vehicle for relieving negative externalities.
To get down to cases, I agree that government wastes a lot of money subsidising farmers, oil producers, etc., etc. That does not, though, constitute an argument that government should add to its total spending by spewing out subsidies to various 'alternative' energy producers.
Petroleum should be one of many commodities used for energy. Burning stuff to produce energy causes the whopping negative externality of global warming. For that reason it may be appropriate to tax those activities in proportion to their negative effects and to use the revenue for mitigation. I assume from what I read that appropriate taxation of petroleum and stopping subsidies such as wars fought to secure the supply might in and of itself make alternative energy sources such as wind, solar, and, I would add, nuclear more economically competitive with petroleum.
I would hope that our political system could acheive such a happy result. I fear, however, that we are going to go through a lot of pork barrel spending on stuff like ethanol and mindless regulatory schemes such as CAFE before we get there.