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By Robert Rapier on Apr 30, 2012 with 54 responses

Why High Oil Prices are Here to Stay

On May 3rd I will be delivering a talk called Moving Beyond Oil Dependence as a part of UC Santa Barbara’s Spring 2012 Chemical Engineering Seminar Series. The talk will roughly follow the outline of my book, and I have used several graphics from the book in the presentation.

However, I created a couple of graphics specifically for this presentation that I believe explain the majority of the oil price escalation over the past decade. True, part of the price rise may be due to speculation, but the following two graphics show just how robust demand has been even in the face of $100 oil. The data source for both graphics is the 2011 BP Statistical Review of World Energy:

Figure 1. Oil demand in Asia Pacific (minus Japan) from 2000 to 2010.

This graphic shows that despite the quadrupling in the price of Brent crude over the decade (and I used Brent crude because it is more representative than West Texas Intermediate of what Asia pays for crude), regional demand in Asia Pacific’s developing countries still grew by 7 million barrels per day. (Demand in Japan — one of Asia Pacific’s developed countries — fell by 1.1 million bpd over the decade).

So when we wonder why gasoline prices haven’t fallen in the U.S. even though U.S. consumption has been declining for several years, that graphic supplies part of the answer. The 1.5 million barrel decline in U.S. demand in the past five years is far less than the demand growth in developing countries, and oil production has not managed to keep pace.

The following graphic shows that this trend is taking place all over the world:

Figure 2. Explosive demand growth occurred in every developing region.

So while the developing countries in Asia Pacific saw a nearly 50% increase in consumption — amounting to 7 million barrels — it wasn’t even the fastest growing region. That distinction belongs to the Middle East, which added 56% to their oil consumption between 2000 and 2010. The Middle East’s total increase in consumption was smaller than that of Asia Pacific at just under 3 million barrels per day, but that is primarily a function of the relative populations of the regions. OPEC countries like Saudi Arabia saw the strongest demand growth in the region. This is understandable considering that the high price of oil brought a huge influx of cash into oil exporting countries, and wealthy countries tend to increase their oil consumption.

This is why — even if we take peak oil completely out of the equation — I don’t ever foresee a sustained return to cheap oil. There are many who have placed most of the blame for increased oil prices on speculation, but those two graphics explain why I believe the issue has far more to do with fundamentals.

Link to Original Article: Why High Oil Prices are Here to Stay

By Robert Rapier

  1. By Dave Runyon on April 30, 2012 at 1:09 pm

    I’d say these two graphs say more than a few thousand words.  Great job cutting right to the biggest problem!

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  2. By Benny BND Cole on April 30, 2012 at 2:42 pm

    I guess it depends on what your definition of “high” is.

    I don’t think oil can be sustained above $100 in the long run–at that level, too much pressure is generated by conservation and substitution.  Of course,  in the short-run, demand and supply are somewhat inelastic. Speculators and manipulators can exploit this reality about oil markets. 

    The spike to $147 in 2008, a spike that helped drain hundreds of billions of dollars out of Western economies, certainly has all the earmarks of a speculative-manipulated bubble.  No, that price could not be sustained–although Goldman Sachs and Peak Oilers (hired by oil producers?)–were doing hysterics at that time about $200 a barrel oil.  Instead we saw $47 a barrel oil.

    I thin we are setting up for another oil price dump, perhaps down to $65-70.  I don’t know when. We might also get a long, long period of price stagnation, ala the 1990s. 

    Of course, we are talking about an industry where the supply is cheap, but locked up in oil-thug-monkey nations, such as Russia, Saudi Arabia, Nigeria, Venezuela, Libya Iraq, Iran—man, is it ugly or what? 

    Look for lower energy prices in the next 20 years—it will be difficult for oil to stay too pricy. 

     

     

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    • By Robert Rapier on April 30, 2012 at 3:33 pm

      I don’t think oil can be sustained above $100 in the long run–at that level, too much pressure is generated by conservation and substitution.

      But those graphics show that on a global basis that isn’t true. It is what happens in highly developed and highly oil-dependent economies, but that’s a minority of the global population.

      Incidentally, this column received a visit from The White House this morning:

      Site Visit from White House

      If that image doesn’t show up, here it is.

      RR

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      • By PetroCrash on April 30, 2012 at 4:15 pm

        I have seen sufficient clues from this White House that they are fully aware of the oil plateau and have figured the logic of what happens next. So I am not surprised that your have found a hit on this article from them. President Obama has all but come right and said “We are at Peak Oil.” He’s given the American people every opportunity to put 2 and 2 together. Here is a quote from the Oval Office address he gave following the BP oil disaster in the Gulf of Mexico:

        “For decades, we have known the days of cheap and easily accessible oil were numbered. For decades, we’ve talked and talked about the need to end America’s century-long addiction to fossil fuels. And for decades, we have failed to act with the sense of urgency that this challenge requires.” – President Obama

        http://petroapocalypse.com/2010/06/17/president-once-again-acknowledges-premise-of-peak-oil/

        Here’s another:

        Now, let me make one broader point, though, about energy. The fact that oil companies now have to go a mile underwater and then drill another three miles below that in order to hit oil tells us something about the direction of the oil industry. Extraction is more expensive and it is going to be inherently more risky…

        …yes, we’re going to still need oil production, but you know what, we can see what’s out there on the horizon, and it’s a problem if we don’t start changing how we operate.  – President Obama

        http://petroapocalypse.com/2010/05/29/president-obama-acknowledges-end-of-easy-oil/

        And there’s more but what I’ve provided sure looks like Peak Oil language to me. It shows me a president who is trying to warn about an issue for which he feels the need to motivate people without coming right out and saying “We are currently at the point of maximum global crude oil extraction, a phenomenon known as “Peak Oil”, a physical limitation on the production crude oil described in 1956 by a geologist named M. King Hubbert…”

         

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    • By Optimist on May 1, 2012 at 6:58 pm

      Trust Benny to not only completely miss the point, but come out swinging with black-is-white, good-is-bad logic in true crazy Californian style. Must be the proximity to Hollywood.

      Let’s try typing this slowly: the first figure shows explosive growth in oil demand in Asia Pacific, regardless of price, Benny. As in: there is no Peak Demand. The second figure shows that reduction in demand has been modest, in the two areas where it happened at all, and that the developing economies are developing a growing appetite for oil. Again: there is no Peak Demand.

      In addition: there is this factoid: growing demand + flat supply = higher prices.

      It’s Economics 101, Benny. No speculation, manipulation, or dark conspiracies required. Then again, Hollywood probably just can’t resist…

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    • By armchair261 on May 2, 2012 at 9:11 pm

      The spike to $147 in 2008, …. certainly has all the earmarks of a speculative-manipulated bubble.  No, that price could not be sustained–although Goldman Sachs and Peak Oilers (hired by oil producers?)

      Apparently the bad guys were fired in July 2008.

      A recent excerpt on GS’s Jim O’Neil, their Asset Management Chairman, on future oil price trends:

      http://www.ibtimes.com/articles/304738/20120226/oil-price-forecast-2012-jim-oneill-goldman.htm

      In his most recent Viewpoint, Goldman Sachs Asset Management Chairman Jim O’Neill gave somewhat of an oil price forecast for 2012 and beyond.

      O’Neill, who earned a Ph.D. for “researching oil prices and their consequences,” said he uses the five-year forward oil price as the “simple broad guide” for the equilibrium oil price, or the price at which supply meets demand on a fundamental level.

      For a few years now, O’Neill said five-year forward oil prices suggest that long-term oil prices have settle around $80 to $100 per barrel, which is noticeably lower than spot oil prices and the oil price forecast of many other experts. 

      When you consider such quotes in the context of recent natural gas price trends, you are forced to conclude that the bad guys have a very unusual conspiracy strategy indeed.

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  3. By PetroCrash on April 30, 2012 at 2:43 pm

    It sure is curious how a capitalist society like the United States can contain so many capitalists that complain/proclaim so loudly that speculation is driving up prices. The very act of “speculation” is to react financially to supply and demand fundamentals. But daring to blame fundamentals for high oil prices these days is viewed by many as heresy. So, we’re given to believe from these quarters that once a commodity peaks, the fundamental basis for pricing is all of a sudden no longer valid? WTF???

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  4. By Robertoe Anderson on April 30, 2012 at 3:02 pm

    One could have looked at these kind of strong underlying fundamentals in early ’08 and made the same “Why High Oil Prices are here to Stay” arguement. I agree the general trend is gonna be up, up, and away but we’ll get some saw tooth action and price pull backs. Benny above says $65-$70. I’ll say $75-$80. Short-lived.

    You’ve done a good job on oil demand with these charts but isnt that only half the equation? We know whats ‘in the pipe’ over the next 5 years but we’ve also had a very consistent overlook depletion approach.

    We’ve basically been in a oil supply plateau (especially conventional) since  ’05. What comes next? There’s too many unknowns in places like Saudi Arabia, the Mideast and Russia.  I personally think the downside of the bell curve will hit within the next 5 years with big depletion problems emerging from a combination of oil wars and the geologic depletion of giant and super giant fields. Of course, this definitely supports your theme here but why over look it? 

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  5. By ben on April 30, 2012 at 4:52 pm

    It’s always fascinating to hear folks speak with pretension on subjects about which they know precious little–and with so little inclination to learn.   No, I wasn’t referring to those new readers over at the White House:)  

    $100 bbl oil is not only sustainable, it’s actually at/near a reasonable benchmark–historically speaking.   For those who took the time to scrutinize Sam Avro’s helpful graphs of a few months ago, the oil market’s price trajectory was captured with a measure of accuracy that is pretty hard to challenge let alone refute.   The price of oil continue it’s march much like global economic “progress” (loose construction on the use of that word),  as we witness demand outpacing supply in the developing world at unprecedented levels.  Yet, this is has ocurred against the backdrop of a sagging global economy of the past half-decade.  One can only imagine what a reinvigorated pace of growth among the the most advanced economies will surely mean in terms of greater demand and upward pressure on prices in the years ahead.   The idea of $100 bbl oil creating conservation/substitutionary-based offsets in demand are not supported by economic projections or historically-based evidence.    I wish it were not so, as such an effect would be most welcome.  Regrettably, we must muddle onward toward a belated transition to more diversified and renewable sources of energy as we move through the challenges ahead.  It is of some consolation to know that insights like those offered in RR’s book can help shape rational expectations about the road that we continue to navigate without much of a map. 

    Ben  G.  

     

     

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    • By Optimist on May 1, 2012 at 7:15 pm

      As has been mentioned elsewhere, these shockingly high gas prices, is really a storm in a teacup: During these last few years of historically high oil prices, Americans spent about $40 a week, or $2,000 a year, on gas. That’s around 5 percent of our overall spending. It’s less than half of what we spend on restaurants and entertainment. Sorry guys. Less than $200/month is too little to get y’all to do much. If you think I’m wrong, go ahead and explain what exactly did YOU change in response to $100/bbl or $4/gal.

      Don’t get depressed about alternatives, yet, Ben. Prices just haven’t gone high enough to trigger real action. Hint: CNG cars are easy to do and natural gas prices are at record lows. Now if only Uncle Sam will get his drunken backside out of the way…

      Oh, and at under $200/month, $100/bbl is sustainable to the average American for a very long time. Even in the midst of the Great Re(de)pression.

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  6. By Sam Geckler on April 30, 2012 at 7:44 pm

    Robert,

    It is no wonder America doesn’t get it; my local paper in Indiana picked up and ran this opinion piece from a commentator at the Forth Worth Texas Star Telegram. I had to post this link given all that you have written about pricing mis-information recently.

    My favorite section has to be the one that starts with:

    “And I admit, I don’t get it. I’m not an economist. I know very little about the oil industry beyond its record quarterly profits reports. But, I also know…

    The piece would have been much better if he had started and ended with just that statement. Here is the link:

    Bob Ray Sanders Nonsense       <== that title is given by me!! :)

    Sam Geckler

     

     

     

     

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  7. By Benny BND Cole on May 1, 2012 at 6:58 pm

    RR-

    Congrats on being spied on by the Oval Office.  I think.

    We will see in June the BP global stats, and how much growth in global demand there has been for crude. Obviously, for the last several years global demand has not been strong.

    As for the future there is lots of cheap oil, the problem is that it is in Iraq, Libya, Iran, Nigeria, Russia, Saudi Arabia etc etc etc. This makes predictions hard, especially about the future. If Iraq goes to 10 mbd, and a new Iran goes to 7 mbd, then we have global gluts. 

    China is a cipher too. They have already mandated electric scooters.  Cars may be next.  The PHEV, if improved enough, may spell doom for OPEC.  I won’t even talk about natural gas. 

    Not sure that oil can stay expensive and hold onto markets. 

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  8. By Optimist on May 1, 2012 at 7:18 pm

    More happy BS speak from the reality-challenged Benny.

    Maybe you should run for office, Benny. You’d fit right in with that crowd…

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  9. By Benny BND Cole on May 2, 2012 at 3:14 pm

    Optimist-

    You may a different pint of view than mine. That’s great–this is a forum for civilized conversation and even debate.  I don’t want to reside in an echo chamber.  I look forward to other points of view. 

    Unfortunately, you seem to post in the spirit of bile.  You are polluting this forum with pointless ad hominem calumny.  

     

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    • By mac on May 2, 2012 at 10:21 pm

      We have diversity in our electrical energy options: 

      Atomic…………. wind………… coal………….. nat. gas…………… hydro……….., geothermal……… and biomass. 

      Also solar………… wave and  tidal too,  and low head hydro  and OTEC. 

      The list goes on.

      —————————————————————————————————

      Options for the ICE  that runs on oil alone   ???

      All of the above if we run our transportation sector on electricity

       

       

       

      No need for bunker crude

       

       

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      • By mac on May 2, 2012 at 11:31 pm

        Almost every country in the world has some means to produce electricity.

        Not so, with oil….

        Mac

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    • By Optimist on May 3, 2012 at 2:34 pm

      Apologies, Benny,

      That particular post indeed contained nothing but bile.

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  10. By mac on May 3, 2012 at 6:23 am

    Someone once said:

     

    “Oil ?”  It’s such a beautiful substance,  What a shame to waste it on the automobile”

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  11. By Optimist on May 3, 2012 at 2:39 pm

    Options for the ICE  that runs on oil alone   ???

    The ICE is going nowhere, in part due to the fact that no ICE has to run on oil alone.

    25 years from now, mac will still be crowing about the imminent death of the ICE. Right along with the new-new-new Malthusians…

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  12. By mac on May 4, 2012 at 1:53 pm

    Optimist.

    “Options for the ICE that runs on oil alone ?”

    How about CNG or LNG ?

     

    Same inefficient internal combustion engine,  just a different fossil fuel.

     

     

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  13. By mac on May 4, 2012 at 2:31 pm

    Optimum.

     

    Go to the Eagle-ford Shale Deposit website.

    http://www.eaglefordshale.com/

    You will see that drillers are backing off nat gas which is far too cheap right now and are going for the oil plays and the nat gas condensates.

     

     

     

     

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  14. By Optimist on May 4, 2012 at 3:16 pm

    How about CNG or LNG ?

    How about putting together more than a oneliner, explaining what it is you are trying to say.

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  15. By mac on May 4, 2012 at 4:30 pm

    The point is that there is not enough demand from the transportation sector to make nat gas competitive.  Too much,  too soon.  and too cheap. 

     

    That won’t last long.  I have a hunch that all of this will soon change as nat gas begins to provide an increasing share of the fossil demand for the ICE as they begin to appear on U.S. roads in increasing numbers just as they are in parts of Europe,  in South America and especially the Far East.

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  16. By mac on May 4, 2012 at 5:25 pm

    Opt.

    The reason “oil companies” are running backwards from nat gas is that they realize that oil will make then more money  in the short term.

     

    Aaaaah,………….. those quarterly reports.

    The real problem is not oil companies, but oil company fixation on oi alone.

     

    Would I be in favor of oil companies taking over the Nat Gas Biz ?

     

    Go right ahead    ……. Just one more step away from “Oil Only”

     

     

     

     

     

     

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  17. By mac on May 4, 2012 at 8:02 pm

    Terrible………..terrible……………..terrible………………

    The very idea that we should use another fossil fuel for our ICE centered transportation system is “heresy” ?

     

    Even if it is ultimately controlled by present day oil companies ?

    Hmmmm…………………  Very Interesting………….

     

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  18. By mac on May 5, 2012 at 4:56 am

    My broker said:

     

    You need to diversify your stock portfolio.  I said ” Why?”

    He said it was unwise to put all my eggs in one basket.

    So,  I sold my oil stocks…….

     

     

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  19. By mac on May 5, 2012 at 6:46 am

    What difference does it make if your strawberries in Dallas are delivered from CA by a semi running on diesel or LNG ?  Apparently, I am missing something here.  Or, perhaps you are missing something.

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  20. By mac on May 5, 2012 at 7:56 am

    Not to worry…. The CNG/LNG business will be controlled by the major oil companies, the NOCs,  etc.

     

    They are already knee deep in it.  Don’t worry too much about your oil company retirement check.

    But, if we are going to use natural gas for the transportation sector we will run out of it !!!,

    Yup, just like we  we ran out of oil a long time ago. 

    We must import oil.  We ran out decades ago.

     

     

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  21. By Frank Weigert on May 6, 2012 at 8:23 am

    Figure 1 is REALLY misleading.

    Note that while the Y axis for Brent Crude Price starts at ZERO, the Y axis for Asia Pacific Demand does not. The actual increase in Asia Pacific Demand is MUCH flatter than the graph appears to show.

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    • By Robert Rapier on May 6, 2012 at 1:45 pm

      There is nothing misleading about that graph. It merely shows that demand growth was not impacted materially as oil prices grew. Demand grew from under 16 million barrels per day to nearly 23 million barrels; that is anything but flat.

      Of course I could have made both slopes look flat by putting the scale from 0 to 1 million, but the slope of the line was not the issue. It was that growth took place regardless, and wasn’t impacted by oil prices. So I disagree with your assessment.

      RR

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  22. By mac on May 6, 2012 at 8:55 pm

    We effectively ran out of oil decades ago………………………..

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  23. By mac on May 6, 2012 at 9:40 pm

    We already understand.

     

    The presently constituted oil companies will control the new CNG/LNG economy.

     

    Not much research needed on that one.

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  24. By mac on May 6, 2012 at 10:23 pm

     

    How to moderate high oil prices ?

    Relatively low prices for natural  gas ?

     

    NO…….  no…..no

    WE must sell gasoline and diesel at inflated prices,  WE all know the world runs on oil.

     

    Don’t we all know this ?

     

    Axiomatic ?              

    Right ???

    WELL……………………. maybe not just exactly……………

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  25. By mac on May 6, 2012 at 11:13 pm

    Robert:

    My next door neighbor just got his left hand crushed in an  oil rig accident.

     

    Well, “You might say:  “I don’t care how many of your friends got their hands crushed.

    It’s all about Me, Me, Me and getting to work tomorrow.

     

    Yup…………………..

     

     

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  26. By mac on May 6, 2012 at 11:47 pm

    Relax…………………..

    Oil is not finished…………..Just a “CNG/LNG”,  break in the action,,,,,,,,,,,,

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  27. By mac on May 7, 2012 at 12:25 am

    Natural Gas prices won’t always be depressed.

    Big opportunity for the cash rich oil companies ?

    No, you are right, the oil companies are too stupid to ever invest in natural gas.

    Oe, are they …///

     

     

    Oh well………………………

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  28. By mac on May 7, 2012 at 12:44 am

    OOe, are they are …///

    “Sorry, typing mistake”

     

     

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  29. By mac on May 7, 2012 at 12:53 am

    If the oil companies will simply deliver on CNG,  I don’t think anyone would have a huge objection to that…………………

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  30. By mac on May 7, 2012 at 1:04 am

    I want to die clutchting a vial of oil.

     

    OKAY,

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  31. By mac on May 7, 2012 at 1:32 am

    Why try to “defeat” the oil companies.

    Perhaps we should encourage them……………..

    To invest in Gee Whizzz………

     

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  32. By mac on May 7, 2012 at 1:49 am

    Look. 

     

    Agreed, there are certain trade0ffs for any energy system .  In regard to LNG/CNG,  The present oil companies should do pretty well.. 

    I Just can’t see the big conflict  here,,,,,,,,,

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  33. By mac on May 7, 2012 at 7:28 pm

    Look….

     

    International western Oil companies can restrict the flow of oil just like the hated OPEC Nations.

     

    Free market ?…………………… I don’t think so……..

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  34. By Robert Rapier on May 7, 2012 at 7:40 pm

    International western Oil companies can restrict the flow of oil just like the hated OPEC Nations.

    First things first. Western oil companies control a tiny fraction of the global oil supply. ExxonMobil is the biggest I believe at around 3%. How much do you think it would benefit them to cut back? Let’s say they cut back to 2%, taking a third of their production offline and giving up huge revenues in the hopes that oil prices will rise more than enough to offset that. There is some spare capacity out there so they run the risk that someone fills that gap. That is the risk of trying to manipulate supplies when you control such a small amount. That’s pretty obvious. Would you run a business that way?

    Second, your comments need to move away from babble and toward some meaningful engagement. I don’t know what your issue was yesterday, but I am not the only person here who has had my fill of garbled comments that don’t make sense. You are pretty bad about just making gratuitous insults, and we are all pretty fed up with that too.

    Consider yourself warned. I am going to start deleting your comments if this sort of thing continues. If you want to debate a particular topic, that’s what this site is all about. If you want to throw around insults and one-liners that leave everyone scratching their heads, your posts will be deleted.

    RR

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  35. By mac on May 7, 2012 at 7:52 pm

    Robert………

    No free market in oil, not from western companies or OPEC.

     

    I know……………. it’s hard to understand

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    • By Robert Rapier on May 7, 2012 at 7:59 pm

      I just explained the problem with your thinking, and in response you simply repeated your claim. So take my response or leave it. Ignorance is sometimes a choice.

      My point is quite simple. It isn’t that manipulation has never occurred nor been attempted. It is that it is not the reason oil prices are where they are. The markets aren’t being gamed by the ExxonMobils of the world. Feel free to believe otherwise. People believe all sorts of kooky things.

      RR

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  36. By mac on May 7, 2012 at 8:01 pm

    Western Oil Companies only need to say:

     

    “We had a glitch”    “Can’t supply at current levels”

     

    Sure,  I understand…………….

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    • By Robert Rapier on May 7, 2012 at 8:03 pm

      Again, is that how you would run your business? Cut production and hope your competitors don’t fill the shortfall? It would be extremely foolish unless you controlled a large fraction of the market (as OPEC does).

      RR

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  37. By mac on May 7, 2012 at 8:08 pm

    To say that western oil companies cannot control the price of oil as OPEC has is non-sense.

    Make the product artificially scarcer by manipulating production.

    Bingo…………………

     

     

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    • By Robert Rapier on May 7, 2012 at 8:22 pm

      It’s not really rocket science for most people. OPEC produces over 40% of the world’s oil and holds 87% of proven global reserves. ExxonMobil produces just over 2 million barrels per day — less than 2.5% of the world’s production. The world likely has enough spare capacity to fill in for any capacity ExxonMobil takes offline even if it did drive up the price somewhat. But that would not be to ExxonMobil’s benefit. So ExxonMobil and OPEC are in very different positions with respect to influencing the world’s oil markets.

      I fail to see why this is difficult to grasp.

      RR

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  38. By mac on May 7, 2012 at 11:25 pm

    It’s not difficult to grasp at all, We are at peak oil (or something like that)

     

    Do any marginal blips  up or down have any significant impact on oil prices,

    Of course…..

    Axiomatic  ??????????………………….. Sure,  Just supply and demand artificially manipulated by artificial production “constraints”

    Yup, I took Econ 101 in college.

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  39. By mac on May 7, 2012 at 11:41 pm

    Look,

     

    I already stated that I thought the oil companies would do just fine in the near to mid-term,

     

    What else can I say ????

     

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  40. By mac on May 8, 2012 at 12:01 am

    I just wanted to thank R-Squared for telling me that the stock market cannot be gamed and that everything that happens on earth is just “straight up “supply and demand.”

    marvelous ……….

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  41. By Dima on June 2, 2012 at 3:44 pm

    Mr. Rapier,

    Though I agree with your point overall, Figure 2 is fairly misleading since the areas covered by the bars are not relatively representative of the real change in oil consumption. Would you mind providing the data, or a link to it, for the change in real numbers?

    -Dima

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    • By Robert Rapier on June 3, 2012 at 9:18 pm

      Would you mind providing the data, or a link to it, for the change in real numbers?

      I actually mentioned the numbers in the article for the two that had the greatest percentage gains. But all of the numbers come from last year’s BP Statistical Review.

      RR

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