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The Fed and peak oil

Lou Grinzo, Scitizen
Laurel Graefe, a senior economic researcher working for the Federal Reserve Bank of Atlanta has written an excellent overview of peak oil, “The Peak Oil Debate”. I consider this a must-read piece, as much for armchair oil experts as beginners, and as much for who published this as what it contains. This should be very high on your list of “brother-in-law” documents, the ones you can safely recommend to co-workers, neighbors, or, well, your brother in law.

While Graefe has taken a decidedly middle of the road approach, which will be enough all by itself to infuriate the Apocalypticons, she also touches on several points that I would have expected a publication from any part of the Fed to ignore.

… The paper talks about peak oil, by that name, without condescending to prefacing it with “so called” or anything similar. I know this sounds like a triviality, but I think it’s critical to de-demonize the term so that politicians and voters can talk about it without all the baggage that the term has grown over the years.

… My biggest concern is that the overall paper is so controlled in tone that a newcomer to the field who hasn’t read Simmons, Skrebowski, Aleklett, or any of the other rational people writing about peak oil could jump to the conclusion that, “Nobody knows what’s going to happen, so I’m not going to change anything or worry about it. Things will work themselves out.” That’s precisely the mindset that will be most damaging, since there is still quite a lot people can do individually and through their influence over concentrations of power (via their vote and spending patterns) before they’re forced to take action by much higher oil prices in just a few years.
(7 July 2009)
EB posted an HTML version of the Fed report HERE. -BA

Swings in Price of Oil Hobble Forecasting

Jad Mouawad, New York Times
The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.

The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery. It is also hobbling businesses and consumers, who are already facing the effects of a stinging recession, as they try in vain to guess where prices will be a year from now — or even next month.

A wild run on the oil markets has occurred in the last 12 months. Last summer, prices surged to a record high above $145 a barrel, driving up gasoline prices to well over $4 a gallon. As the global economy faltered, oil tumbled to $33 a barrel in December. But oil has risen 55 percent since the beginning of the year, to $70 a barrel, pushing gas prices up again to $2.60 a gallon, according to AAA, the automobile club.

“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”

Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York.
(5 July 2009)
Comment by Jon Talton at Seattle Times:

“The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery.” So writes the New York Times, which for all its excellence has been clueless on many energy issues.

While speculation in the markets may have some role in the price swings, they are mostly a result of the new energy paradigm. Call it peak oil if you wish, but it’s another reality of discontinuity that puzzles the conventional wisdom. Thus we have the yo-yo effect (exaggerated by speculation and unwinding of leveraged contracts). Oil prices rise as there’s a chance the world economy is reviving, and with it demand again outstripping production; they drop back as that hope is dashed, as happened with Friday’s unemployment report.

Dmitry Orlov provides a solution just as plausible as today’s denial.

The Wealthy World at its ‘oil break point’

Peter Tertzakian, Calgary Herald
… Recovering-economy-equals-higher-oil-prices is a mostly valid notion in a “peak oil” world; however, everyone in the oil business should be aware that the relationship between economy and demand for petroleum products is changing significantly in mature western countries — a block of nations that I call the “Wealthy World.” In these 30 or so rich countries, where 46 million of the world’s 84 million barrels a day of petroleum are consumed, positive economic activity no longer has much if any impact on demand growth. Put another way, don’t assume that more oil will be guzzled in Wealthy World when the big economies of the United States, Japan and European Union break out of their six-quarter blue funk.

First, let’s be clear that we are not in a recession, but a contraction. Recession means a slowdown in growth, contraction means outright shrinkage. The wealth of Wealthy World economies, of which the United States is the largest, kept shrinking through the second quarter, making them poorer on a year-over-year basis for the first time since the Second World War. Consensus estimates suggest that when the second-quarter numbers get reported, U.S. shrinkage will be around two and three per cent, a major bout of wallet tightening that, not surprisingly, has led to unemployment of 9.5 per cent (as reported last week).

For oil demand, the distinction between recession and contraction is important, because GDP growth and oil consumption typically move in tandem, especially in industrializing nations. So an economic contraction translates into a fall in absolute oil consumption, not just a stunting of growth.

But there are more forces acting on oil demand than just the economy. Similar to what happened in the early 1980s, Wealthy World nations are at another “oil break point.” High prices, the fear of even higher prices, issues of energy security, environmental concern and technological innovation are all combining with aggressive policy implementations to “get off oil.” These dynamics have led to a major dissociation between economy and petroleum demand in Wealthy World. As a resident of that world, you may not feel it, but the data show it clearly.
(6 July 2009)