Comments (141)

• andy

  It seems to me that it could be the reverse. If you have relatively constant money supply and a bubble is burst, you would expect
  - overabundant supply of some assets relative to other assets
  - because of credit contraction falling prices, but faster in the 'bubble areas' then in the others

  However, we live in inflationary environment. Factor in high inflation in all prices and what you'll get:
  - relatively stable prices of 'bubble assets'
  - rising prices of 'non-bubble assets'

  The rising price of oil is consistent with a scenario where oil is a non-bubble asset. What's the difference? You should see overabundant oil supplies and production capacity.
  It seems to me somewhat unlikely that current supplies and production capacity is overabundant (longer term) relative to other assets. Actually, I see just the opposite, especially in the USA. However, the overproduction always becomes evident after the bubble is burst and never before so I may be perfectly wrong :)

  Published: June 2, 2008 8:53 AM

• Bastiat

  I find "bubble" to be a bad word choice, especially since it gives credence to the "it's the evil speculators fault" crowd.

  If the price of oil is only catching up with previous money supply expansion, it's just a fair readjustment. A "bubble" would be an unstoppable price rise in face of rising inventories. I do not see that now.

  Published: June 2, 2008 9:06 AM

• Miklos Hollender

  A great article, Frank. Does it also mean that our "typically Austrian" savings in gold & silver bars/coins/futures/whatevers will crash? As gold usually moves the same way as oil, doesn't it? At least that's what the bullionvault.com analysts say, that gold is linked to commodities, especially oil.

  Published: June 2, 2008 9:17 AM

• Michael Young

  I'm unconvinced that the rise in oil prices is a 'bubble' as defined in the article. I see the price change as a rational response to predictions about changing supply and demand, the expectation that growth in the supply of oil will lag behind growth in the demand for oil. Speculation eases us towards the new price point.

  I think an increase in oil prices would occur regardless of the fed's monetary policy. A loose monetary policy could make things _worse_, of course, but it isn't the primary cause.

  Published: June 2, 2008 9:22 AM

• fundamentalist

  If you check the price of oil in terms of gold, you’ll find that the price has risen in the last few years (by about 50%, but depending on your base year), but not as much as the price of oil in dollar terms. So there seems to be a combination of monetary inflation causing dollar devaluation and supply/demand imbalance causing the rise in price. The portion of the rise in prices not attributable to monetary inflation (that part in which oil has risen in value relative to gold) might be explained by Jimmy Rogers’ cycles in investment in commodities. After all, oil companies invested almost no money at all in searching for new oil or increasing production from old field during the 1990’s when the price of oil was ridiculously low. They didn’t start to invest until a few years into the new century because they thought the price rises were a bubble that would soon burst.

  Now that oil companies are investing in new production (the Saudi’s just started), we should see the supply/demand discrepancy abate in the next five years. But the damage done by monetary policy will remain. Assuming no more monetary inflation (not a realistic assumption) we might see that 50% increase in prices relative to gold recovered, which would mean a 30% reduction in the current price. That translates to a price of about $80/barrel sometime in the next five years. But please, don’t anyone go sell oil short on this analysis. This is not investment advice; it’s nothing but SWAG.

  Of course, if the price of gold rises, as it did today, that would mean less of the price surge is due to supply/demand and more to monetary policy. Ain't forecasting fun?

  Published: June 2, 2008 10:23 AM

• TLWP Sam

  Isn't a problem of oil the cost of extraction? It was said 'cheap oil' was cheap because it was already under pressure - drill a hole in the ground and the oil gushes out therefore all you have to do is collect it (It'd be nice if there's an oil extraction expert to confirm this). I hear a problem with oil is that there's plenty of oil but it's not under much pressure and therefore requires energy to get it out of the ground and invariably Peak Oil is when is takes more than a barrel of oil to extract another barrel of oil. Therefore more oil can't be magically brought into existence just because the price is high. It's a similar situation with gold - there may be umpteen gold in the seawater but the gold just can't be recovered from the seawater (not economically anyway). Then again it's easy for demand to increase ("we want more cars"). But one day super-duper ultracapacitors will arrive . . .

  Published: June 2, 2008 11:10 AM

• fundamentalist

  I’m no oil expert, but I know that major oil producing nations, such as Mexico, Russia, Iraq and Iran have bled their oil industries dry of cash by not investing in maintenance. Their production declines are due largely to lack of maintenance. Iran and Iraq haven’t invested a dime in maintenance in about 30 years.

  I don’t know about the pressure, but I know that pump jacks have always been very common in Oklahoma and Texas because the pressure drops rapidly with new wells and the oil has to be pumped out. As the well ages, there are lots of techniques for increasing production, such as applying steam.
  

  Published: June 2, 2008 11:43 AM

• Mike D.

  I think you can tie the flow of money from hedge funds flowing into commodities to the Fed lowering interest rate to below the core inflation rate. Now that the mortgage industry is shot, investors are turning to hard assets and commodities as hedges to inflation.
  
  Although Austrians tend to eschew quantitative methods, a UCLA Geophysics Professor, Didier Sornette claims to have a way of identifying bubbles in markets. He looks for super-exponential growth. In other words, the time it takes for something to double in value decreases over time Using this criteria, the price of oil form 2002 to present has doubled on average every 34 months. However,if we look from 2007, the doubling period has decreased to 15 months. This would indicate a bubble.
  
  With regard to supply, the market has given a huge signal. However, the time it takes for the oil industry to react to this is very long. I'm sure BP would love to pump an extra 300,000bpd out of Prudhoe Bay, but once oilfields go into decline, this is not feasible, regardless of how high the price goes. The increased supply will need to come from new oilfields, which take several years to develop.

  Published: June 2, 2008 1:21 PM

• Jake

  And so articles like Mr. Shostak's helps piece together the puzzle in order to figure out this mess.

  Here's another great article that sheds more light on the commodities issue. It ties up with Mr Shostak's comments on loose monetary policy which helped drive commodity prices, and explains who is driving commodity prices.

  http://freethemarketman.wordpress.com/2008/05/28/quantifying-commodities-speculation/

  Published: June 2, 2008 1:26 PM

• Jive Dadson

  Bubbles, like the NASDAQ and housing bubbles, are marked by high prices
  in conjunction with copious supply. In marked contrast to the bubbles,
  crude oil capacity at today's market price is inadequate for current
  demand. According to T. Boone Pickens, who probably knows as much about
  such things as anybody, oil demand is at 87 million bbl daily, while
  supplies are stretched to yield 85 million bbls. Food supplies are
  lower than they have been since the Marshall plan after World War II.
  Without excess capacity, there can be no mis-allocation. The tight oil
  and food supplies resulted from mis-allocation of capital.

  If you want to blame governments, there is plenty of blame to apportion:
  the continuing subsidies to farmers for not growing food, the ethanol
  fiasco, and export and capital controls in many countries. But it's not
  a bubble. It's supply vs. demand.

  
  

  Published: June 2, 2008 2:03 PM

• Brandon

  I don't find the bubble argument to be all that compelling. In "The Austrian Theory of the Trade Cycle and Other Essays" one of the essays (by Mises I believe, but I don't have the copy here) noted that bubbles tend to form around long-term goods such as infrastructure and construction. Unless the oil companies are investing in building new refineries and drills, which they're not from what I've heard, then the rise in oil prices is due to other factors.

  Remember, the lower interest rates signal to investors that consumers are supposedly saving for long-term, expensive goods (like buildings) and are moving away from consumer goods (like oil).

  Published: June 2, 2008 2:16 PM

• Eric

  While I have little doubt that bad monetary policy (creating money out of nothing) causes some bubbles (e.g. the housing bubble) I don't think that Frank's essay has given us a logical proof that the price of Gold is as high as it is because of the same bubble causing mechanism. I take exception to his logical method, not his facts.

  Whenever I see a writer provide a definition for a term that differs from the common understanding of that term, I wonder if there's a logic error hidden somewhere.

  I remember when I was taking some theorem-proof type of math classes and the professor proceeded to define something in a strange way. It might have been a definition for logarithms, I forget exactly, but when we all asked how he could simply define something in this manner - especially how his definition didn't seem at all like the common notion of the term - his answer was: "Because I am God".

  His point was that in the logic of mathematical proofs a definition is anything you want it to be. It is not a proof and not even a premise. It's nothing more than an abbreviation for the thing. In math terms a definition is "if and only if" with the term that is being defined. One cannot prove anything from a definition; one can only determine if something else IS the same as the definition (by proving the bidirectional implies of the iff). Eventually, this prof proved that his definition was consistent with what we were commonly accustomed to seeing, but there were many logical steps required to show that fact. He taught me that in a chain of reasoning, one could often begin at the end and trace back to the beginning.

  So, in Franks case, he defines a bubble as "the outcome that RESULTS from loose monetary policy". This is NOT what most writers mean by the term bubble. Normally, a bubble is the outcome of new subjective values in the minds of those who would purchase the item. Now just what caused all these new value judgements is often quite interesting, and often the result of some sort of fraud, but it doesn't follow that there is only ONE cause of that outcome we traditionally refer to as a bubble.

  In the next sentence, Frank makes a statement that he does not prove, "In the absence of monetary pumping, these activities would not have emerged." This is derivable simply from his definition of a bubble.

  A iff B means that I can say, if not A then not B (or if not B then not A). So, if not pumping, then not bubble is simply a logical outcome of his definition of a bubble.

  For example, I remember the hoola hoop bubble. One day I returned from 2 weeks camping and I was amazed that all one could see were people outside playing with these hoops. This bubble popped in a few months as the craze declined. I doubt if monetary pumping was responsible for this market phenomenon. I also think that the famous Tulip bubble might have been from some other cause, but I don't quite remember the details of that one.

  Frank may be correct about the cause of the prices of oil, but I'm not sure he has proven so in this article. I think that a lot of the "bubble" price of oil might be explained simply because those that buy the oil believe the price will go up (possibly because of unrest in the Middle East that could drastically effect supply) and so they are willing to pay more today in hopes of a profit tomorrow. It's sort of like how people have a higher demand to hold cash when they don't have confidence in their ability to predict the future.
  

  Published: June 2, 2008 2:51 PM

• fundamentalist

  Eric: "I think that a lot of the "bubble" price of oil might be explained simply because those that buy the oil believe the price will go up (possibly because of unrest in the Middle East that could drastically effect supply) and so they are willing to pay more today in hopes of a profit tomorrow."

  Isn't that the same as speculation? And where do the speculators get the extra money to speculate with? Even mainstream econ acknowledges that an increase in the money supply is a necessary accompaniment of a bubble or of speculation. Austrian econ says that it is a sufficient cause. When new money is created, it's not easy to tell into which sector it will go when spent, invested or used in speculation. But it generally goes into commodities, the stock market or real estate, first. All commodities, not just oil, are up dramatcically. I heard on NPR this morning that the cost of shells for guns is up 75% because of prince increases for the metals used to make them. When you have a general increase in all commodities, including food, you can bet it's caused by monetary policy.

  Published: June 2, 2008 3:31 PM

• Florid Economist

  Government actions do affect the pricing, but not to the extent as mentioned in the article. There is absolutely no doubt that the true culprit of pushing the price of oil higher than ever before is speculation; feeding the false notion that demand is outpacing supply or that geographic turmoil will make oil harder to obtain. The fact is that is simply not true. We are not running out of oil anytime soon. And oil rich nations will continue to sell oil because if they don't they will either go poor, find themselves invaded or both.

  For a supply and demand problem to exist, there literally would not have to be enough oil in the earth to satisfy current demand. And that is not the case. The supply is there, but it is not being offered up for sale. There are two parties who very much gain from the high price of any commodity and those are the producers and investors of it. And they have every reason to want the price of the commodity including oil to increase. Those who get out early are the winners, those who don’t are the losers and the producers, and well they almost always win.

  Every time an event of any length takes place in the middle-east, the first thing everyone starts talking about is oil. Is there enough? Will it be harder to come by? Will there be an embargo?

  If you look at the period right after 9/11, for all real purposes, the price of oil has been rising ever since. The argument that supply has so drastically decreased in the few short years since then or that demand has increased so much as to cause the price to break new heights, is just simply incorrect at the most basic level. And to even say that Fed actions are completely responsible is also hard to swallow. The price of oil has been edging up since 9/11. Recent Fed actions were in response to the housing "bubble", which was truly a bubble, although they may have contributed to the price climb a bit. However, it is truly a result of taking advantage of a high-stakes emotionally charged commodity that just happens to reside mostly in an area of the world which is geopolitically broken, which appears in the paper and pasted across television screens every single day that reminds every single consumer that they can't live without it.

  
  

  Published: June 2, 2008 3:34 PM

• Eric

  Fundamentalist: "And where do the speculators get the extra money to speculate with?"

  They can use money that had been invested elsewhere, by selling off speculations. Or they can borrow the money (not from banks or the FED - from friends etc.).

  Sure, newly created money often causes bubbles, but the article states that that's the ONLY way to cause bubbles, and that was my beef. I think Frank has to do a better job of proving cause and effect here. I'm not saying he's wrong, but that he simply didn't prove his case.
  

  Published: June 2, 2008 4:21 PM

• fundamentalist

  Eric: "Sure, newly created money often causes bubbles, but the article states that that's the ONLY way to cause bubbles, and that was my beef."

  I think that's pretty standard ABCT. Also, Kindleberger's book Manias, Panics, and Crashes: A History of Financial Crises, comes to the same conclusion.

  Without excess money from credit expansion, one good, such as oil, could gain in price only at the expense of others. Although I guess you could make the argument that commodities have gained at the expense of real estate and the stock market. That's a possibility.

  Published: June 2, 2008 4:45 PM

• gooddebate

  I think that we're all falling victim to 'we have nothing to listen to but the media' syndrome and making assumptions about what's going on based on what we hear.

  There are two facts that make me uncomfortable with most of the explanations given so far as to why oil has spiked. One is that we're not close to peak oil and the other is we have record highs without record low supply.

  I've always wanted to know how Enron controlled the market and would love to hear any insight. For now I'm left with questions. Why is the media trying to convince everyone that we're at peak oil and that there's a shortage?

  Here's a quote that I found:
  "There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak [oil] theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." — National Gas Week, September 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006"

  Wasn't it only 8 years ago when we found out that wall street was using the media to sell the public on stocks to give the impression that it could go on forever...

  If anybody follows Ed Wallace he has a couple of very interesting articles (which you'll see greatly influenced my comments here so far) which I think are the closest thing I've seen as to possibly revealing what's going on. I would call Ed a former libertarian who sees himself as now more compassionate in his social views. But he's followed the oil business for years and seems pretty reliable on that subject.

  http://www.star-telegram.com/ed_wallace/story/651928.html
  http://www.star-telegram.com/ed_wallace/story/659081.html

  I have no dog in the hunt so I'm just interested in vetting this information and hearing what others think.

  Published: June 2, 2008 5:42 PM

• fundamentalist

  gooddebate: "One is that we're not close to peak oil and the other is we have record highs without record low supply."

  Conspiracies by hedge funds is all people are left with to explain high oil prices when inventories are not low. But keep in mind that few of the investors in commodities are Joe Sixpack. Most are other hedge funds, oil companies, refiners and Southwest Airlines. In other words, they're pretty sophisticated themselves and don't get their financial news from CNBC.

  People will always be confused if they don't understand the role of money in price inflation. If supply/demand didn't change at all, a 50% increase in the supply of money would, on average, increase the price of oil by roughly 50%. It's the old quantity theory in the broader sense: as the supply of one commodity increases relative to others, its value decreases proportionately. In this case, money is the commodity.

  That's not to say that demand/supply has nothing to do with it, but in addition to raising prices directly through a greater supply of dollars, increased money supply can increase demand, too, by fooling business people into investing in new ventures. Those new ventures hire more workers who in turn demand more gasoline, and it encourages more shipment of goods via trucks, planes and trains.

  gooddebate: "I would call Ed a former libertarian who sees himself as now more compassionate in his social views."

  I know you didn't mean anything by it, but some of us are a little sensitive about this compassion thing. We can prove that libertarianism is more compassionate to the poor than any form of intervention or socialism. In fact, Mises chapter on welfare economics has plenty of proof.

  As for peak oil nonsense, check out this article from FEE: http://www.fee.org/publications/the-freeman/article.asp?aid=5006. It's called "The Growing Abundance of Fossil Fuels" and it's by the president of the Institute for Energy Research in Houston, Texas.

  Published: June 2, 2008 7:32 PM

• Taras Smereka

  Sorry man, but I don't think this bubble will ever pop. Oil prices are high and going higher as the dollar is continually devalued.

  Published: June 2, 2008 8:50 PM

• Matt

  "There are many factors behind the sharp increase in the oil price, but one is usually overlooked: it's a bubble."

  That's a strange comment to make since "Bubbles" are only knows as such after they burst. Is what we are seeing a "bubble" or a new plateau because of the high growth of the money supply ? Who knows but in fifty years time $100 oil may seem as $1 oil was fifty years ago..in the meantime prices will fluctuate. On the other hand we may be fast approaching a Super Bubble that will finally burry the Federal Reserve once and for all.

  Published: June 2, 2008 9:56 PM

• N. Joseph Potts

  This seems to me the first time I have heard of a bubble in a consumption good. Refined oil has a limited shelf life, and storing oil is expensive and difficult even for crude (other than leaving it where it was found, and then you don't know how much you have). Bubbles in real estate, tulip bulbs, stock in dotcoms, and so on, are all in things having a longer shelf life and cheaper to store on a per-value basis. Oil is harder to hoard than silver.

  This is the chief factor fueling (ahem) my reservations about recognizing oil as a bubble. The article was a bit abstract for me, leaving unspecified just how creating more money causes the economy to CONSUME more petroleum. How it causes more investment in futures and perhaps even stored product, sure. But CONSUMING more?

  I don't rule it out, I just feel I'm left hanging a bit.

  Published: June 2, 2008 10:00 PM

• scott t

  "That's a strange comment to make since "Bubbles" are only knows as such after they burst. Is what we are seeing a "bubble" or a new plateau because of the high growth of the money supply?"

  i dunno...i have seen posts articles on this website by people who said there was going to be a correction in the 'tech industry' some years ago. i guess they based this on federal reserve policy and other economic information available to them.
  my dad in the year 2000 tended an invesment fund owned by an organization for assisting visually impaired individuals. the fund had lost about 100k, nearly half its original amount. my dad requested that the fund be closed and to move the money into a fixed interest account -- the smith-barney advisor told my dad he was making a big mistake and that big upswing was just about to occur. luckily my dad got the money out. had he not, another 20 percent or so would have been lost. was the guy at smith barney lying to my dad? my guess is that he probobly was.
  but maybe just misinformed about stock surges just around the corner?
  i have seen numerous articles online about 401ks losing somewhere around forty percent across the board back around 2000 -- including my dads own personal 401k.
  anyone else have a similar experience?

  Published: June 3, 2008 1:38 AM

• newson

  joseph n potts says:
  "This seems to me the first time I have heard of a bubble in a consumption good. Refined oil has a limited shelf life, and storing oil is expensive and difficult even for crude (other than leaving it where it was found, and then you don't know how much you have)."

  totally agree. almost all futures contracts are cash settled, leaving only the commercials to take delivery. if the price of oil has gone up, it's because of supply constraints in the face of rising demand. naturally the austrians would argue that increased economic activity caused by central banks worldwide has raised demand for all manner of consumer and producer items, almost all of which require oil.

  Published: June 3, 2008 2:25 AM

• newson

  fundamentalist says:
  "As for peak oil nonsense, check out this article from FEE..."

  michael lynch is a dr pangloss. check out matt simmons, author of "twilight in the desert". here's an mp3 link for you http://www.financialsense.com/Experts/2005/Simmons.html

  besides, all the technologies described in the fee piece are predicated on much higher oil prices. and the lead times for commercialization are significant. throw in the odd wild card like an al quaida operation in the gulf or an iranian war, and i cannot see big downside in the oil market. maybe a technical retracement...

  Published: June 3, 2008 2:38 AM

• Rod Campbell-Ross

  Nicely written as the article was; and not discounting the Fed and its prolifigate monetery policies, the article was garbage.

  For years this economics site and and others have been preaching that oil supply is "created" by demand and that Peak Oil is intellectually bankrupt. Now that things are panning out pretty much as the Peak Oilers predicted (only earlier), economists are casting around looking for any scapegoat they can find. I think they should all be hoist by their own petard - it is the supply and demand stupid!

  Look up your Econ 101 text books and find out what happens when very nearly inelastic demand meets completely inelastic supply. The price swings around in wild gyrations and mostly goes up. That is exactly what has been happening.

  So all the stuff about the Fed, "speculators" (another subject illustrating the deep ignorance of many, including those clowns in Congress), OPEC etc is just BS.

  It is the supply and demand stupid!

  Published: June 3, 2008 6:12 AM

• Rod Campbell-Ross

  I forgot to add this quote from the WSJ:

  The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional
  market logic and looks set to continue. Fresh data from the U.S. DOE show the amount of petroleum products shipped by the world's top oil exporters
  fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well. There are several reasons behind the
  net-export decline. Soaring profits from high-price crude have fueled a boom in oil demand in Saudi Arabia [and other producers]

  If anybody can be bothered to get the data off the DOE site you will find net exports dropping like a stone. This is brewing into a fully fledged crisis (it could hit the Gulf states first) that may well have become extreme by the end of this year.

  As I say: it is the supply and demand stupid!

  Published: June 3, 2008 6:19 AM

• Paul Johnston

  Loose money has contributed to a rising cost of oil, but to say that loose money is the primary cause of the rise is to give too much weight to minor matters.
  Were oil in a bubble, we would see an increase in storage. We do not. In fact, we see just the opposite. Take a look at this (esp. gasoline storage).
  http//tonto.eia.doe.gov/oog/info/twip/twip.asp
  There is a general downward in storage, except for gasoline, which has fallen off a cliff. Oscar Wilde’s parrot would understand what is going on: “Supply and demand. Supply and demand.”

  T. Boone Pickens is a bit too full of himself, but nevertheless he has spent a lifetime punching holes in the ground, and knows the oil business. He says that 85 million barrels (in the neighborhood of 12 million TONS) is about as much as we’re going to be able to do, per day, in getting oil out of the ground. We’re there. (See esp. charts 3 and 4. Basically crude oil extraction has been flat for three years.)

  http://www.peakoil.nl/wp-content/uploads/2007/09/oilwatch_monthly_september2007.pdf

  It seems to me that you vastly over-rate the influence of money. To expect from money authorities anything other than incompetence, inconsistency, stupidity and self-interest is to play games with yourself. THEY will screw up in every way possible, 99 per cent of the time. Get over it.

  If you don’t want get over it, take a job with government.
  In my opinion it is only a slight overstatement to say the following (in what is a paraphrase of Bakunin): if an enterprise fails because of bad money policy, you may rest assured that bad money policy is not the cause of the failure.
  Take care and keep up the good work. (((Yes, good work. You Austrians are so much better than the rest that it’s not funny, but still, you are at times, like all of your tribe, a little too impressed with theory. Oil is real, and the oil game is changing fast.)))
  Paul Johnston
  

  Published: June 3, 2008 9:00 AM

• mickeyman

  It's true that the rising price of oil reflects a large misallocation of resources. But that misallocation happened in the past as a result of previous policies which drove the price of oil artificially low. Capital went elsewhere, rather than into oil infrastructure. It is this missing generation of investment in oil infrastructure that makes it very difficult and time-consuming to increase supply at a time when demand is hitting all-time highs.

  Published: June 3, 2008 9:10 AM

• Mark

  What a bunch of gibberish Frank. Marty Feldstein has an easier hypothesis to understand. Which is as follows. Because of the U.S. trade deficit, the dollar must fall via world currencies. Which means foreign goods will become more expensive and U.S. goods will become cheaper.

  Oil is one of those foreign goods which the world is vying for with currencies that are appreciating against the dollar and will likely to do so in the future.

  Remember Frank the U.S. is in a global economy now. Which according to Nicholas Taleb author of the "Black Swan" will mean that places that have a high labor rate will trade goods and service that are scalable low marginal cost informational goods in exchange for labor intensive goods.

  Which translates into only a few individuals making gobs of money in the U.S. but nevertheless a still relatively stronger currency then in China.

  
  The only problem is that it's difficult for the average U.S. citizen to fill up his tank in a global economy with rubber ducks made in China sold at Wal Mart that are exchanged for porno movies made in Hollywood.

  Better luck next time Frank.

  Published: June 3, 2008 10:57 AM

• gooddebate

  fundamentalist

  gooddebate: "I would call Ed a former libertarian who sees himself as now more compassionate in his social views."

  I know you didn't mean anything by it, but some of us are a little sensitive about this compassion thing. We can prove that libertarianism is more compassionate to the poor than any form of intervention or socialism. In fact, Mises chapter on welfare economics has plenty of proof.

  Hmmm, the sarcasm in my mind didn't translate into the post. Thanks for pointing that out. There is compassion that people 'say' they have and then there's the reality of it which is only achieved through sound principles.

  Published: June 3, 2008 11:38 AM

• fundamentalist

  gooddebate, Sorry I didn't catch the sarcasm. I tend of have a tin ear in that respect.

  Published: June 3, 2008 12:05 PM

• fundamentalist

  Rod: “For years this economics site and and others have been preaching that oil supply is "created" by demand and that Peak Oil is intellectually bankrupt.”

  You haven’t been paying attention if that’s what you think. Austrian econ teaches that entrepreneurs create oil supply through investment based on foresight.

  Rod: “Now that things are panning out pretty much as the Peak Oilers predicted (only earlier), economists are casting around looking for any scapegoat they can find.”

  Peak Oilers have been right many times in the past. Before this current cycle, they were right in the 1970’s. Even a broken clock is right twice a day.

  Rod: “Look up your Econ 101 text books and find out what happens when very nearly inelastic demand meets completely inelastic supply.”

  That would be a Keynesian textbook. Keynesian economists never understood how anything worked. They’re the reason that economics has such a bad reputation. Read an Austrian econ book and you’ll understand how things really work. When prices across the board rise together, or in quick succession as they have recently, then monetary policy is the problem, because without an increase in the money supply, demand/supply changes cause some prices to fall in proportion as other prices rise and no net price increase results. An increase in money supplied by banks causes most prices to rise.

  Rod: “If anybody can be bothered to get the data off the DOE site you will find net exports dropping like a stone.”

  Supply/demand does play a role in the current rise of oil prices, but no one can be sure how much that surge in demand is caused by monetary policy. Low interest rates spurs investment in capital intensive industries that use a lot of energy and creates greater demand for commodities such as oil.

  While it’s true that oil producers haven’t increased supply lately, that may not be due to a lack of supply. Investment in the oil industry died in the 90’s when oil was dirt cheap. When prices rose several years ago, oil execs refused to spend on increased supplies because they thought the price increase was temporary. Then, when they decided to invest more, they couldn’t find the rigs or the workers because so many had been laid off during the 90’s. The industry is overcoming those problems and will produce more oil in the near future, but it may take another five years for prices to fall. When the Feds decide to fight price inflation and investment in new supplies bears fruit, prices will fall some.

  Peak Oilers have been screaming that we are running out of oil for almost a century. If the past repeats, they’ll be wrong again. They’re only argument is that this time, things are different. Of course, that’s what they said last time, too.
  

  Published: June 3, 2008 12:09 PM

• fundamentalist

  Paul Johnston: “Loose money has contributed to a rising cost of oil, but to say that loose money is the primary cause of the rise is to give too much weight to minor matters. Were oil in a bubble, we would see an increase in storage.”

  I don’t follow how an increase in storage would indicate a bubble. It’s clear in hindsight that the stock market of the late 90’s was a bubble, and that housing recently experienced a bubble. In both cases, demand exceded supply, so there was little excess capacity in either stocks or housing until the bubble burst. I would expect something similar to happen in the oil industry where storage of oil would fall until the bubble bursts.

  Paul: “if an enterprise fails because of bad money policy, you may rest assured that bad money policy is not the cause of the failure.”

  Some firms are run better than others. It’s the weaker ones that succomb to the effects of changes in monetary policy. But if monetary policy causes an expansion of businesses that is not warranted by the fundamentals (that is, the capital infrastructure doesn’t exist to support the expansion), then why isn’t monetary policy at fault?

  Paul: “you are at times, like all of your tribe, a little too impressed with theory. Oil is real, and the oil game is changing fast.”

  Every ideology out there, from radical Marxism to radical Islam finds proof of its truths in the current situation and in history. Only sound theory can make sense of current events or history. If you lack sound theory to interpret events, you’ll be blown first one direction and then another as events change. Show me a person who lacks theory and I’ll show you one who lives for the moment and ignores the long run consequences of his actions.

  You may not realize it, but you are a victim of fallacies promoted over a century ago by the German Historical School and American Institutionalists. Both ideologies taught that there is no such thing as economic science because there is no regularity in the way people respond to circumstances. Every historical situation is unique and follows no economic principles. If they were right, then every student of economics is wasting his time.

  mickeyman: “It is this missing generation of investment in oil infrastructure that makes it very difficult and time-consuming to increase supply at a time when demand is hitting all-time highs.”

  You’re right about the supply side, but we need to consider why demand has increased so suddenly. Oil prices haven’t crept up at the rate of inflation for other goods. They exploded! Most economists blame India and China, but both countries were growing at high rates during the 90’s when oil prices were very low. They didn’t suddenly jump to 60% growth rates after 2000. But monetary growth did explode after 2000.

  How can you tell if demand growth is caused by monetary growth or by changes in wealth due to productivity increases? If the money supply doesn’t grow at all and output increases so that people become wealthier, then prices will fall because the ratio of output to money increases, making money more valuable, which is the same thing as saying prices fall. So an increase in real wealth (that is, the increase in the production of goods) tends to cause prices to fall in general with a fixed money supply.

  If the production of one good doesn’t increase, oil for example, while the demand for that good increases due to greater wealth, then the price for that good will increase. But because the money supply remains fixed, there isn’t enough money to increase the price of that good and leave the prices of other goods the same, so the prices of other goods will fall, leaving no net increase in prices.

  Or to put it another way, if other goods increase in quantity through greater investment and productivity, but oil doesn’t, oil will increase in value relative to other goods, which means that the price of oil will increase and the prices of other goods will fall.

  So increases in wealth tend to cause a general fall in prices with a fixed money supply. If oil production didn’t increase as fast as the production of other goods, the ratio of prices will change, but not the general price level.

  Now let’s look at another scenario: there is no increase in real wealth, that is, output remains the same, but the money supply grows. With fixed output, demand remains fixed, but with a growing supply of money, people have more money available to pay for the same demand, so prices rise. Or to put it another way, money is just another commodity, so when its quantity increases relative to other goods, its value falls proportionally. When the value of money falls, the prices of all goods tend to rise, including oil.

  In both scenarios the price of oil rose, but if all you saw were the price increases how would you work backwards and determine the causes of the price increase? You couldn’t look at just oil prices, because oil prices rose in both scenarios. You could look at the prices of other commodities such as metals and food, and assets such as stocks and real estate. If they increased in price along with oil then you would know that money played some role because a general price increase can happen only with an increase in the quantity of money. You could look at the increase in the quantity of money and see if you can eyeball a correlation between that increase and price increases.

  But the simplest way is to look at gold. In any measurement technique, you need a fixed standard. We have fixed standards for lengths, weights, volume and time, but we don’t have one for wealth. A fixed measure of wealth would have to show no increase in quantity at all so that we could measure changes in the quantities of other goods against it. Gold is the best we can do because its quantity changes the least of any other commodity on earth. It’s not perfect, but it’s the best we can do.

  Measured in terms of gold, the price of oil shows a much smaller increase than the price of oil in dollar terms. This suggests that monetary policy (increases in the quanity of dollars) is the chief cause of oil price increase. But because the gold price of oil has increased, that increase must be due to changes in supply/demand.
  

  Published: June 3, 2008 12:11 PM

• Robin Anderson

  While I appreciate Dr. Shostak's criticism of the Fed's policies, he seems to have very little understanding of global petroleum markets. A few notes:

  1 - Crude's price is based on GLOBAL supply and demand, with US monetary policy only having a small affect on demand.

  2 - Rising petroleum prices do not cause inflation (although they can be a symptom of it). Rising price will allocate more capital to oil exploration (not a mis-allocation of resources as Shostak claims).

  3 - Crude oil production increased in 2007 over 2006, to 85.63 million barrels per day (per IEA). Despite all the media hype about Nigeria, etc., it will again set an all time record high this year.

  4 - Say what you want about China's monetary policy, its petroleum demand per capita is still microscopic. It will continue rapid growth as it should (farmers need tractors, people riding mopeds, etc.)

  5 - Referring to oil's price as a bubble implies it will "pop" or be reduced sharply soon. Not according to NYMEX crude oil deliverable in 2016, which still trades at over $127 bbl. This clear price signal also dispels the myth that we are running out of oil. We've got 3 to 4 centuries more oil supply (conventional and unconventional) still in the ground. It will just be more costly to extract it than in year's past.

  6 - Oil's price hikes are a direct response to demand. Demand is expected to hit 86.84 million b/d this year, an increase of 28% since 1993.

  Published: June 3, 2008 12:15 PM

• jls

  the cheif economist for MF Global seems to have a pretty solid grasp of the markets to me.
  1. the US's loose monetary policy has hardly been pusued in a vacuum. take a look at the balance sheets of the central banks of the world. they are exploding.
  2. the whole point of the article seemed to be that the rising prices were a result and/or symtom of loose monetary policy - not a cause of inflation.
  3. not sure what your point is here. production increasing slightly, but prices increasing a lot.
  4. china has a massive inflation problem currently, regardless of wether they should be advancing or not. they have a money supply going thru the roof.
  5. a few weeks ago, nymex futures were predicting lower prices in far dated contracts. 2 years ago, with the front month trading around 72, the march 2011 futures were trading around 68. given the financing, this is a big discount. these are a volatile indicator.
  5. he never said the price increases were not a response to demand, he said the demand arose from excessively loose monitary policy.

  excessive money and credit creation must go somewhere. i see nothing in your post to indicate money and credit creation have not been excessive. i agree that demand has outstripped production. the isssue is wether that demand is sustainable, or based on misallocation of resources and/or debasement of the currencies of the world. personally, i think it's some of both.
  

  Published: June 3, 2008 1:53 PM

• jp

  I'd like to know why the increase in money supply sets the foundation for additional demand for oil and not things like salt, potatoes, paper, pork bellies etc. Shostak gives no reason why oil should be the one blessed by new money.

  In fact, you could take out all mentions of oil in the article and insert the name of any rising commodity/asset class and it would still say the same thing. The article is too general and offers no particulars.

  Published: June 3, 2008 3:01 PM

• fundamentalist

  jp: "I'd like to know why the increase in money supply sets the foundation for additional demand for oil and not things like salt, potatoes, paper, pork bellies etc."

  I think Shostack assumes readers have a basic knowledge of the Austrian Business Cycle Theory, ABCT. New money via lower interest rates stimulates investment in capital intensive industries first which creates a demand for industrial commodities, such as oil. Notice that all metals, not just oil, are trading at record high levels. Later, the money flows through the economy and raises prices of consumer goods, such as food.

  Published: June 3, 2008 4:31 PM

• Rod Campbell-Ross

  Robin - you are quoting the "All liquids" figure. this includes syncrudes from tar and biofuels, which by definition are not crude oil.

  Oil is important for its energy contribution to society. These "fuels" are a mirage.

  Fundamentalist - I think you will find the laws of supply and demand are common to all text books. I acknowledge the role of money and the Feds prolifigacy. That does not explain stagnant supply.

  Also Peak Oilers have never claimed oil is running out. In fact the opposite. Peak Oil is the moment of greatest production. We state specifically the oil will never run out and there are good technical reasons for that. The point of Peak Oil is that the rate of flow cannot be increased. Paul Johnston put it well. I am not going to repeat it.

  On investment - there is heaps of investment - it is not translating into production though. And never will.

  Published: June 3, 2008 5:23 PM

• Oil Shock

  It takes energy to extract energy. If it takes 2 barrels of oil to produce one barrel of oil, it wouldn't make sense to produce it. Most of the low hanging fruit is taken. There is plenty of petroleum in this world, but it will cost more money and more energy to extract. At some point EROEI ( Energy returned on energy invested ) will prevent oil from being extracted profitably.

  Peak oil is real. U.S oil production is only 50% of what it was back in 1970. Oil production in U.K, Norway, Indonesia, Mexico are all well below their peaks. The last time world replaced the reserve it produced was back in mid 80s. Peak of new discovery was in the 60s, and even the high oil prices of 70s couldn't change that fact. The only question is whether a worldwide peak is imminent.

  On the positive side, planet earth is not a closed system. It gets more sunlight each day than we have consumed since the beginning of the oil age. So there is always potential for finding alternatives. Petroleum is also a form of solar energy.

  Check out - http://www.theviewfromthepeak.net

  Published: June 3, 2008 6:10 PM

• fundamentalist

  Rod: "the laws of supply and demand are common to all text books."

  Yes, but only Austrian econ gets the role of money right. Mainstream econ blaims everything on supply/demand and shocks (acts of God).

  Rod:"I acknowledge the role of money and the Feds prolifigacy. That does not explain stagnant supply."

  To some degree it does. Monetary inflation of the 1970's caused price increases that encouraged oil companies to invest too much in new production, which resulted in the crash in oil prices in 1986. It took 15 years to work off the malinvestment caused by loose monetary policy. Now the Fed has reignited the cycle with its loose policies the first few years of this century.

  Rod: "Peak Oil is the moment of greatest production."

  You must have forgotten the 70's. That's what people said then. Don't you remember the billions that the Feds spent on alternative fuels, especially shale oil, coal gasification, and Canadian tar sands because the experts were convinced that oil production had peaked?

  I could be wrong. We may have found all of the oil that this planet has and we have nothing to look forward to but declining production. But I've heard it before and the peak oil chickens were wrong. History is on my side. Hysteria is all that peak oil has going for it.

  Published: June 3, 2008 6:58 PM

• fundamentalist

  PS, Ethanol got its start as an alternative fuel in the 1970's, also. I purchased gas with 10% ethanol for many years. That decade also introduced daylight savings time to save energy. All because the peak oil experts convinced Jimmy Carter that we would never find another drop of oil on this planet at all beyond known reserves at the time. Shows how smart Carter was; he believed them.

  Published: June 3, 2008 7:05 PM

• Alan Davis

  Yes oil is in a speculative bubble right now. Traders and the world are trying to figure out how to deal with peak oil (and how to make money from it). My guess is it will come down to around $90 when the shakeout occurs, then slowly start going back up. Every pipeline bombing or hurricane will send oil spiking. The price will ratchet up but, also slip down a few notches on occasion. The trend is up long term.

  This opens up opportunities. We can panic and be at the oil producing nation's mercy or produce our own energy. Canada is making high quality oil form tar sands at under $15 a barrel. Our gigantic Oil Shale deposits are much richer than the tar sands and the conversion process is similar, meaning we can do it too! The Nazis produced most of their war time fuel from coal, in a Coal-to-Liquid (CTL) process. We have the largest concentrations of coal in the world. Read about it here:

  www.AmericansForJobsAndEnergy.org

  Yes, when oil was $15 a barrel it was not profitable to mine Oil Shale or necessary to covert coal to fuel. We will never see oil cheap again. India's Satol Energy is making bank converting coal to fuel. No, doubt we can do it and create tons of jobs. Just gotta have a little faith in our country's inginuity and rattle our lawmakers chains.

  Alan

  Published: June 3, 2008 8:10 PM

• DS

  ALL commodities have been going up since the early part of the decade in lock step with global monetary inflation. It's not just the Fed, it's all central banks increasing the supply of fiat currency together. They are all inflating in unison, most of them targeting the the dollar directly (China) or indirectly (Europe). The slight differences in the world currency values mask the fact that they are all increasing the supply of their currencies, some more than others. The Fed is at the bottom of this game played by all.

  Anybody who doesn't understand this will be continually surprised by events.

  If you're going to use "peak oil" to explain the dramatic rise in oil. then you will also need a theory for peak copper, peak iron (steel has increased almost 50% in the last 5 months), peak gold, peak agriculture, peak cement, etc. etc. These things are all going up at dramatic and similar (though certainly not identical) rates. This is only possible in a monetary inflationist enviornment.

  And it's already bleeding through to businesses and consumers with the highly manipulated government statistics around the globe going up at insane rates. U.S. 4.3%(if you believe that one...), EU 4%, China over 10%, Russia 12%, Vietnam over 20%, it goes on and on like a broken record around the globe. This is inflation, it is real and as Milton Friedman said "inflation is always and everywhere a monetary phenomenon". What we have is inflation on a global scale.

  This is not new, most of these events are eerily similar to the 1970's when inflation drove up the price of oil (not the other way around as the economically illiterate are apt to confuse). But we are only in about 1970 in comparison, a time when 4% inflation was so enough to make Nixon take us off the Bretton Woods "gold standard". The central bankers and politicians of the world were operating under flawed economic theories then and amazingly, are operating under the same theories now.

  What is the most logical result?

  Published: June 3, 2008 8:44 PM

• Rod Campbell-Ross

  No one has said that we have found all the oil. We will never find all the oil - or to put it another way, we will always find more oil. It is putting it into production that counts vs. natural decline in existing fields.

  I believe Peak Gold has occurred - again there is heaps of gold in the ground. What is at issue is the rate at which it is mined. However gold is different - nearly all the gold that has ever been mined still exists. Oil is consumed.

  Here is a question fundamentalist. Why are the IOC's (Shell etc) doing share buy backs? I would say it is a statement by the directors that they cannot invest the money in the oil (and energy more generally) business profitably, so they are busy winding themselves up.

  So, Peak Oil is about flows, not money. Understand field decline and what new projects are coming on line and you will understand Peak Oil. We know what projects are coming on line; and when - over the course of the next decade or so. The data is particularly good out for the next 6-8 years. We also understand field decline, so we know what production will be with reasonable accuracy at least as far out. It looks like a Peak. If a major find is made in that period we can update the model, but it hasn't happened yet.

  The net export situation, as summed up by the WSJ, is making the whole problem considerably more irksome. The 2m barrel decline in exports is most of the reason behind the price trend of the last 10 years. Money is also to blame, however that picture is complex and certainly not the main culprit.

  We also know from the laws of thermodynamics that oil cannot be replaced.

  Ergo, we have a problem!

  Published: June 3, 2008 10:44 PM

• Fed up

  "We also know from the laws of thermodynamics that oil cannot be replaced."

  What nonsense is this ?

  
  

  Published: June 4, 2008 12:28 AM

• newson

  ds says:
  "If you're going to use "peak oil" to explain the dramatic rise in oil. then you will also need a theory for peak copper, peak iron (steel has increased almost 50% in the last 5 months), peak gold, peak agriculture, peak cement, etc. etc."

  obviously energy costs feed in to all industrial and agricultural processes. trying to spin out the portion of price rises due to changing supply/demand and that caused by monetary effects is a losing game.

  in the absence of accurate figures re: proved oil reserves, and the opacity of many of the opec-member regimes, i think peak-oil is the sensible default position. when vast new reserves are proved up, i'll revise my point of view.

  Published: June 4, 2008 1:30 AM

• RdC

  @All who think Peak Oil is a crackpot theory:

  I know you don't like to read long Peak-Oil texts, so here it is, a picture worth a thousand words:

  http://www.theoildrum.com/story/2006/4/26/18109/8251

  (The SECOND graph is the inportant one)

  If you took the 10 seconds or so to look at that graph, you immideately understand why texts like those posted by fundamentalist ( http://www.fee.org/publications/the-freeman/article.asp?aid=5006. ) are deeply flawed.

  Right in the first paragraph, it sais: "World oil reserves today are more than 15 times greater than they were when record keeping began in 1948;"

  This statement is only correct if you believe the GOVERNMENT-created statistics (or rather: claims) of the OPEC-countries.

  @fundamentalist:

  1) Do you really believe that Saudi-Arabia reporting an almost 100 Gb increase in reserves in just one year (which would be the biggest oil-find in history) has anything to do with reality? Especially since no large oil-field was found in Saudi-Arabia for many decades and almost all OPEC-countries reported similar sudden and unexplained increases in reserves?

  2) Do you really believe that OPEC-countries can produce oil while maintaining reserves AT THE SAME time? Saudi-Arabia produces over 1Gb per year, yet the reserves stayed exactly the same over the last 20 years. If reserve-numbers had anything to do with geology, we would see at least some kind of fluctuation as it seems very far-fetched that every year exactly the same amount of oil is found as is produced.

  3) You seem very sceptical of governments (like me), why do you take the word of the Saudi-Arabia government without questioning? Especially when looking at the above mentioned irregularities?

  
  Sorry to rain on your parade, but Peak Oil is real and may already have happened (we only know for sure a few years after the fact, just like at Peak Oil for the USA in 1970)

  Peak Oil will not mean the end of oil, but it will mean the end of CHEAP oil.

  Published: June 4, 2008 1:46 AM

• newson

  rod campbell-ross says:
  "Why are the IOC's (Shell etc) doing share buy backs? I would say it is a statement by the directors that they cannot invest the money in the oil (and energy more generally) business profitably, so they are busy winding themselves up."

  i can't envision any winding up, but the buy-backs make sense when executive pay is determined by eps, or share-price performance. plus the management and board obviously think their paper is still undervalued and a worthwhile investment. i think you'll find exploration budgets have swelled considerably, even as buy-backs continued.

  Published: June 4, 2008 2:50 AM

• DS

  "obviously energy costs feed in to all industrial and agricultural processes. trying to spin out the portion of price rises due to changing supply/demand and that caused by monetary effects is a losing game."

  That's an argument for basically all prices of anything with oil content to rise (all of the consumer items that have droped in price over the last decade and a half also have significant oil content), and that increases in price would have to come AFTER the rise in oil. That's not at all what has happened. So-called "cost-push" inflation requires prices of an input to rise first, then initially buyers resist the price increases, then all competitors see the same cost increases and pass most that on to their customers. For that theory to have any validity the price of oil would have had to go up FIRST, then the prices of other commodities would have risen later, and at lesser rates than the price oil since oil is only a percentage of their cost inputs. Many of these commodities have risen at steeper rates than oil, even though oil is only a portion of their input costs.

  Of course the price behavior of copper, agricultural commodities, steel, gold, etc., etc. over the last decade show no such timing. For that theory to hold water the price of oil would have had to go up first, then the prices of other commodities would have risen later, and at lesser rates than the price oil since oil is only a percentage of their cost inputs.

  The correct cause and effect is that the central bankers of the world (including the Fed) started creating fiat currency at an alarming rate back at the time of the Aisian currency and Russian debt crises, then as a lead up to Y2K, then to clean up the aftermath of the tech bubble and recession(which then moved into housing), then to combat imaginary "deflation" that was a product of inflation statistics that had been rigged to never show any inflation, then a tightening of interest rates that at best slowed the rate of money creation, to the currency created to bail out banks in the aftermath of the housing bubble. That's the cause.

  The effect was that all that extra liquidity went from worthless tech stocks to driving up the price of housing. Then when the increases in interest rates started affecting mortgage holders and slowing the boom in housing all of the liquidity had to go somewhere (since the Fed's tightening steps didn't actually remove any of it). That somewhere was into commodities, which started rising around 2000, but really took off in the 2004-2005 timeframe and have been going up ever since. The latest jump since the Fed started flooding the street with money in August was just a continuation of a long trend.

  Side note: the reason supply is just now starting to drop slightly IS the result of cost-push inflation: Deep sea oil rigs and most drilling equipment are in short supply and the costs of building new ones is rising rapidly (they are made mostly of steel which has risen dramatically since 2004, and almost 50% since January). This also affects alternative fuel investments which don't look as promising with dramatically higher input costs. We are just starting to see these kinds of spiralling prices. You see, in order to understand cost-push inflation you have to get the timing right.

  What is interesting is that there are a lot of people making a lot of money right now based on the "peak oil" theory because for now "peak oil" and monetary inflation theory come to the same conclusions. At some point the central bankers of the world will have to start contracting the world money supply, inflation is starting to severely affect people who vote and riot in large numbers. When the liquidity starts to be removed you'll see a dramatic pull-back in ALL of these commodities - leaving the "peak oil" people standing there with a puzzled look on their faces, wondering why all their money disappeared.

  I'm not sure when this will happen (Ben Bernanke saying publicly that he wants a strong dollar yesterday doesn't qualify), but history shows that when peak oil theory meets a contractionary Fed, peak oil loses, big time.

  We've been through this before for anybody who cares to read a history book (written by somebody who knows what they are talking about). His name was Paul Volker and he closest thing the world has seen to a sound money central banker. From the time the price of oil was $80 a barrel in the early 80's to $10 a barrel in the late 90's the "peak oil" crowd pretty much disappeared, because they were just plain wrong. As they are now.

  Sometimes, for a little while, you can be right about something for the wrong reason. But only for a while.

  Published: June 4, 2008 7:00 AM

• fundamentalist

  DS, Really good posts! Thanks!
  Regarding oil as a cause of price inflation in other goods, I might add that the closer a good is to being a consumer good, the less effect oil prices have on its price. For example, I used to work for a trucking company when oil/diesel prices were high and rising. We added huge fuel surcharges to shipping charges and I asked one shipper how he could put up with such high shipping costs. He told me that shipping was such a small part of the total cost of the products they shipped that it wasn’t really a factor. Of course, that all depends upon the value of the product being shipped. Salt producers are very price sensitive, while manufacturers of aircraft engines aren’t sensitive at all. Even with gasoline, the cost of oil is only about 65% of its cost. The cost of diesel in shipping is a much smaller percentage of the total cost, driver pay and overhead being far greater. Then the cost of shipping manufactured goods falls to very small percentages of the cost of goods. In other words, the impact of oil price increases falls off dramatically the closer you get to consumer goods. So blaming oil for the rapid increases in all prices counters common sense.
  

  Published: June 4, 2008 9:16 AM

• fundamentalist

  Rod: “We know what projects are coming on line; and when - over the course of the next decade or so. The data is particularly good out for the next 6-8 years. We also understand field decline, so we know what production will be with reasonable accuracy at least as far out. It looks like a Peak. If a major find is made in that period we can update the model, but it hasn't happened yet.”

  Many people wrote exactly the same thing in 1979. I have no argument with the fact that we can’t increase production from existing fields in the near future. I do have an argument with people saying they know without any shadow of doubt how much oil exists in currently producing fields. I know a little bit about how field size is determined and it’s not an exact science. That’s one reason known reserve figures change.

  But that was the situation in the 70’s and early 80’s, too. What had changed by 1986 to cause oil prices to plummet and oil companies to go bankrupt?
  1) The Feds got inflation under control and the dollar soared agaisnt other currencies.
  2) High prices encouraged greater production, which came in two forms: a. better technology for getting oil from old fields, especially horizontal drilling, which dramatically reduced the cost of drilling. b. discoveries of new fields.

  Oil companies conduct two distinct types of drilling—wildcatting and development. Wildcatting is drilling in new, unexplored areas for new sources of oil. This type of drilling is almost as risky as gambling. The success ratio is very low, making the costs very high. But companies to it in order to find new sources of oil. Once a new source is found, oil companies do development drilling to increase production from the field. Obviously, development drilling is much more successful than wildcat drilling.

  While wildcat drilling finds new pools of oil, development drilling can prove that an existing pool has more or less oil than originally thought. And it increases the flow of oil from existing pools.
  That detail is important to know because many countries that own oil have done very little development drilling in the past 30 years, especially Iran and Iraq. The figures we have on field size are about 30 years old and from a time when technology was primitive compared to today.

  Mexico, Russia and Venezuela have spent very little on development drilling, preferring to use the cash to buy political allies. Relatively small amounts of money spent on development drilling could 1) increase the flow of oil from existing fields and 2) might show that the fields are larger than thought, or that they are smaller, too.

  Development drilling will produce the quickest results, but wildcatting is absolutely necessary for the long run. However, both have been held back by lack of experienced workers and drilling rigs. In the cases of Iraq and Iran, the problem has been political as well.

  Will someone from the Peak Oil cheering section please explain why 1) it’s impossible for increased expenditures on developmental and wilcat drilling to find and produce more oil and 2) why you choose to ignore very sound economic principles regarding the effect of increases in the money supply on commodity prices?

  RdC: “You seem very sceptical of governments (like me), why do you take the word of the Saudi-Arabia government without questioning? Especially when looking at the above mentioned irregularities?”
  Yes, I am skeptical. But as I wrote above, I also know that the estimation of reserve size is an inexact science and can change with technology improvements and investment in development drilling, which few countries did when oil prices were low. You might ask, too, what incentives do countries or oil companies have for exaggerating reserves? They don’t get paid for reserves, just for production. There might be a good reason; I just can’t think of one.
  

  Published: June 4, 2008 9:20 AM

• Robin Anderson

  No offense, but the peak oil movement is a political movement, not based on logic.

  If it had validity, believers could simply purchase futures crude oil contracts with borrowed money and become millionaires. Or pool their funds and purchase entire oil companies. Where were they when Chevron purchased Unocal in 2005 for $11 per barrel of reserves?

  Instead, they tend post on message boards and in newspapers -- describe doom and gloom scenarios of production drops, that require government intervention to avoid the "crises".

  Global demand will soon require over 100-million b/d of production. If there were any doubt that supply could reach that you would see an enormous hike in price (a much higher magnitude that we've seen the past few years).

  Yes, OPEC countries and others might fudge on reserves estimates. But Venezuela's Orinoco belt has more unconventional reserves than the entire world's reserves of conventional oil. At today's prices, they can easily be brought to market.

  Published: June 4, 2008 11:26 AM

• newson

  fundamentalist says:
  "You might ask, too, what incentives do countries or oil companies have for exaggerating reserves? They don’t get paid for reserves, just for production. There might be a good reason; I just can’t think of one."

  the reserves opec countries declared determined their production quotas, so the incentives were all tilted in favour of overstating . the cause for concern is that no independent auditing of reserves is possible for many of the national oil companies.

  ds says:
  "From the time the price of oil was $80 a barrel in the early 80's to $10 a barrel in the late 90's the "peak oil" crowd pretty much disappeared, because they were just plain wrong. As they are now."

  well, hubbert original prediction in 1956 was that us continental production would peak between 1965 and 1970. it peaked in 1970. his prediction was that world prediction would peak in around 50 years (so 2006ish). i'd like to see some major oil discoveries before i write off peak-oil.

  the early eighties could have been called an oil bubble, "dallas" was thetv show, the arabs had taken over park lane and mayfair in london, vast amounts had been spent on extraction infrastructure, and petroleum engineering was the career to choose. we're only now starting to make up for the lost years of the eighties and nineties.

  the monetary stimulus is certainly a factor in the rise of all commodities, but shostak's argument is that oil is a "bubble", ie that monetary factors and not supply/demand elements predominate.

  that consumer items containing oil inputs have had relatively flat prices could equally be pinned on china's mercantilistic trade policy, or improved productivity or the entrance of many countries into the global trading arena.

  as for paul volcker and history... take a look at the vastly lower debt levels in the late seventies and eighties. are you seriously saying any politician even in the medium term is going to throw america into deflation, with its debts and the derivatives disaster brewing? until i see massive retail investing in commodities, the bubble scenario is fanciful. sharp retracements are always going to shake out weak hands, but i don't see jimmy rogers getting out of his commodities positions. i think this bull has got years to run. the p/e's of the oil majors are less than half what they were in the early eighties

  Published: June 4, 2008 11:32 AM

• newson

  robin anderson says:
  "No offense, but the peak oil movement is a political movement, not based on logic.
  If it had validity, believers could simply purchase futures crude oil contracts with borrowed money and become millionaires.

  they have, check out the payouts for some of the hedgefunders.

  Published: June 4, 2008 11:35 AM

• Larry N. Martin

  Peak Oil will not mean the end of oil, but it will mean the end of CHEAP oil.
  
  Bah! Wake me when the price of oil catches up with inflation.

  Published: June 4, 2008 11:44 AM

• Mark G. Warner

  I’d like to make a couple of comments about Dr. Shostak’s “Oil Price Bubble article. First I agree with him that today’s soaring world oil prices, in dollar terms, are due in part to monetary inflation on the part of the Fed. Not only has the latest orgy of dollar inflation caused oil prices to rise along with most other prices, as one familiar with Austrian economics would expect, but it has drawn a significant amount of capital and labor into wasteful construction of high-end, housing for which there is insufficient demand to pay the costs of construction let alone allow for a profit. T Absent monetary inflation, these resources could very well have been channeled into the construction or improvement of oil refineries instead.
  But there is another factor that I see as contributing mightily to high energy prices, which to my surprise hasn’t been brought up in this discussion. I am referring to the hefty subsidies that governments of China, India, Malaysia, Iran, Iraq, and several other Asian countries are dishing out to their automobile-loving constituents. According to several articles that I’ve read, people in these countries are not even paying half of what U.S. consumers are paying for gasoline. Are these tax-funded government subsidies not only promoting wasteful consumption in these countries but also diverting gasoline away from North American and European countries, thereby leading to artificially high prices outside of Asia?
  

  Published: June 4, 2008 3:37 PM

• fundamentalist

  Mark: "I am referring to the hefty subsidies that governments of China, India, Malaysia, Iran, Iraq, and several other Asian countries..."

  Very good point. I knew Iran subsidized gasoline, but I didn't know those other countries are. I watched an episode of Globe Trekker, the crazy Australian guy, on PBS last week. He was touring Iran and mentioned that gasoline was about 30 cents per gallon in dollar terms. That's one reason Iran imports so much gasoline. And unless they change their ways, Iran will stop exporting oil in a few years.

  Published: June 4, 2008 4:24 PM

• Walt D.

  fundamentalist
  
  The point of Peak Oil is one of flow - not reserves. The amount of oil left in the ground of the average reservoir is, if I remember correctly, at least 80% - there is no economic way to pump it out. If we take the North Sea as an example, it is already in decline - there are no new wells to be drilled in the North Sea that can make up the difference between peak and current production. Since the oil is discovered by seismic exploration rather than drilling, it is highly unlikely that anything significant has been overlooked. If there were, nobody would be drilling in the Gulf of Mexico. All that peak oil says is that we are not going to see the production from the North Sea going back to the peak level.
  

  Published: June 4, 2008 4:43 PM

• Michael A. Clem

  All that peak oil says is that we are not going to see the production from the North Sea going back to the peak level.
  
  Because, naturally, technology and research will grind to a halt, in spite of the history and development of petroleum oil in the first place, and for that matter, the history of technology since the industrial revolution. And if oil has been "cheap" relative to other sources of fuel, it will continue to be cheaper for some time to come, relative to other sources of fuel, and thus well worth continuing R&D into the technology. And, if at some point it is no longer cheap compared to other sources of fuel, guess what? More R&D will go into developing alternative fuels. Funny how all that economic stuff encourages people to take one sort of action or the other, isn't it?

  Published: June 4, 2008 5:01 PM

• fundamentalist

  Walt D. "All that peak oil says is that we are not going to see the production from the North Sea going back to the peak level."

  Are you sure? That seems a little too obvious. In other words, you say that peak oil claims nothing more than that depleated fields will remain depleted, in the same way that depleated gold mines won't suddenly sprout more gold.

  Published: June 4, 2008 7:24 PM

• newson

  michael e clem says:
  "More R&D will go into developing alternative fuels. Funny how all that economic stuff encourages people to take one sort of action or the other, isn't it?

  so then it isn't a bubble is it? if it's a bubble, and entirely a product of monetary factors, the price will drop and costly r&d will be unnecessary, and indeed wasteful.
  

  Published: June 4, 2008 7:28 PM

• newson

  to fundamentalist:
  i'm not sure that your analogy with reworking gold talings is technically feasible with oil fields, many of which are offshore. but the argument around peak oil is not about resource exhaustion, more about flattening production hitting a wall of demand.

  check out matt simmons' analysis. here's some of his podcasts: http://www.financialsense.com/Experts/2007/Simmons.html

  Published: June 4, 2008 7:42 PM

• Walt D.

  fundamentalist
  
  
  Are you sure? That seems a little too obvious. In other words, you say that peak oil claims nothing more than that depleated fields will remain depleted, in the same way that depleated gold mines won't suddenly sprout more gold.
  
  What I am saying is that it can't be done easily and it can't be done economically with current technology, otherwise we would have seen the output from the North Sea and Prudhoe Bay shoot up to cash in on the record high prices.
  
  To answer your question about gold, the largest gold resource in the US is the tailings pond at Bingham Canyon in Utah. Bingham Canyon was primarily a copper mine. However, gold was present in trace quantities. It was mined in the 80's when gold went to $800, but for most of the life of the mine, it ended up in the tailings pond. Most metallurgical processes have difficulty of getting all the gold out. We get what is known as a "constant tail". This can be 1/20 oz per ton. In other words $40 worth of gold at $800 per oz.
  However, we had no viable technology that could process the metric tonne of gold to get $40 worth of gold out while spending less than $40.
  
  The same is true of oil. You can get more out by water flooding, steam injection, surfactant injection, and enzyme injection. Again the cost is the key factor. However, even if the process recovers more oil, the key question is the daily production rate. This is why tar sands and oil shale have difficulty competing in terms of rate of production when compared to a pressurized well where the oil spurts out of the ground.

  Published: June 4, 2008 10:56 PM

• Rod Campbell-Ross

  Robin Anderson - not sure what to say to you. Peak oil is based only on logic, whereas Austrian economics is a bit like John Frum. Haven't heard of him? Well in the island of Tanna he is a religion - other wise known as a cargo cult. They believe that one day John Frum will return one day (heard that before); and when he does he going to bring them all the stuff they will ever need. I learnt that by going there, but you could check it out on Google.

  I am afraid all you guys who think that this is price "bubble" are in for a rude shock. The logic of field decline is relentless - and it is winning. Also it doesn't matter why oil isn't being extracted. It could be geological, political, technical, lack of human resources, aging infrastructure, wars, illegal American occupations - anything really. It does not change the fact that it is not being extracted though.

  The net export problem is the really scary problem. DOE data suggests that there may be a crisis in the Gulf states as early as this summer.

  What I have been wondering is this: How high do prices have to go before you guys stop believing your own BS? Prices have climbed and climbed and climbed. The trend has been clear for 10 years. Why don't you just accept it?

  Published: June 5, 2008 3:17 AM

• newson

  rod campbell-ross:
  "Peak oil is based only on logic, whereas Austrian economics is a bit like John Frum"

  hey, austrian economics doesn't enter into the peak oil debate, except to the extent that crazy monetary policy can stimulate production in all manner of unexpected ways. maybe too many plasma flat-screen tv's and not enough deep-water drilling rigs, and maybe too many trained nail-technicians and not enough pipeline specialists. so many production bottlenecks come to mind, but just look at how petrobras has got a stranglehold on offshore drilling rigs.

  austrian economics doesn't say that increasing standards of living are inevitable, just that a proper monetary regime maximizes efficient use of resources. you could bring kevin carson into the argument and point out the vast subsidy granted to the motor vehicle industry through public road building etc.

  despite all the various distortions introduced by the state, i would say many of these are either structural, and that the oil price is on a long-term upward trajectory, as are all commodities.

  Published: June 5, 2008 4:25 AM

• Rod Campbell-Ross

  Newson: all true. What I do object to though is the neoclassical economics principle that oil is infinite. All it takes is a little investment and hey presto! - more oil! Actually decades of investment and looking for oil hasn't resulted in more oil being found. that trend line too is clear.

  Mexico, Venezuela and Russia were mentioned earlier. I think the Russians may object to the notion that their oil industry has suffered a lack of investment.

  OPEC "reserves" have also been mentioned. Fundamentalist: look up the data - all the countries bumped up official reserves in the "quota wars" of the 1980's, Saddam didn't bother with any fine tuned BS - he just went for a nice round 100bn barrels - up from around 30 - without discovering a drop of oil. OPEC reserves are overstated by approx 300 bn barrels. However as I have said many times on this site - reserves are meaningless - it is the flow that counts.

  The story is infinitely more complex than that

  Published: June 5, 2008 4:53 AM

• DS

  newson wrote:

  "the monetary stimulus is certainly a factor in the rise of all commodities, but shostak's argument is that oil is a "bubble", ie that monetary factors and not supply/demand elements predominate."

  I find Shostak's argument odd, I agree with his diagnosis of the monetary conditions but I disagree that it is a bubble. Though fiat monetary expansion is a pre-condition for any bubble to form, a bubble (a subjective term with no precise definition) is generally one where the price of something goes up dramatically and - at least in the last stages - in spite of the supply-demand conditions. The final stages being charaterized by a situation where the supply is more than adequate to meet all real demand but people keep buying anyway because they think it will continue to go up in price, until that situation reverses.

  During the run-up of oil and all other commodities the supply conditions certainly have not exceeded demand, hence no bubble. But the supply conditions for ALL commodities are too diverse to conclude that this explains their run-up in unison. What does explain their price behavior over the last decade is response to dramatic increases in global fiat currency creation. In the supply and demand relationship that the market tries to equilibrate every second of every day, the change in the value of the money used as a medium of exchange is integral to the supply-demand relationship, and it's effects are very uneven on supply and demand respectively.

  Conclusion: Oil and all commodities are responding to legitimate supply and demand conditions, mainly being driven by the decline in value of all currencies taht they are traded in, not in comparison to each other but in comparison to a stable benchmark like gold. The increasing supply of all fiat currencies worldwide explains most (not all) of the run-up in these commodities.

  Of course the price of commodities and any other good or service is driven by many factors peculiar to their particular supply-demand situation, but the statistical odds of all of those factors independently aligning in the same direction at the same time are staggering. Akin the odds that somebody else in the Los Angeles with statistically identical DNA to OJ Simpson was the one who actually slit Ron and Nicole's throats. It's possible but highly unlikely.

  "as for paul volcker and history... take a look at the vastly lower debt levels in the late seventies and eighties. are you seriously saying any politician even in the medium term is going to throw america into deflation, with its debts and the derivatives disaster brewing? until i see massive retail investing in commodities, the bubble scenario is fanciful. sharp retracements are always going to shake out weak hands, but i don't see jimmy rogers getting out of his commodities positions. i think this bull has got years to run. the p/e's of the oil majors are less than half what they were in the early eighties"

  I don't disagree with any of that, I am having trouble imagining in the current global political environment how any central bank, much less all of them at the same time, will start contracting the world money supply. From the time the Fed started printing money in the early 60's, through the end of Breton-Woods, until a Fed chairman who was intent on actively contracting the money supply was accidentally appointed (the single instance where Jimmy Carter being an economically illiterate buffoon who had no idea what Volker would do actually benefitted the US and the world) was a 20 year period of loose money and inflation. Only after every worng headed, counter productive measure was aplied by the clueless politicians it still took an un-elected head of the banking cartel to improve the situation, and he was only able to do it because he was never required to face a voter. Ain't democracy great?

  No, I don't see that happening tomorrow, but it will have to happen some day, and when it does the "peak oil" crowd will be holding dust. The "bond vigilanties" of teh 1970's were very late to the party, but they eventually showed up. When real interest rates start rising the central bansk of the world will have a harder and harder time keeping them down, which is what happened in the 70's. They may lose that battle - Volker actually didn't hve to contract the money supply that much to drive interest rates into the 20% range in the early 80's - the fixed income markets did most of the work for him. Resisting the upward pull of interest rates would have been the more difficult task at that point.

  At some point somebody in a central bank somewhere will dust off the history of the last episode and apply the same medicine. I am still completely astonished only 20 years is long enough to completely forget everything learned from the worst economic decade since the great depression - the lesson being: don't cause inflation to begin with, then it won't be so painful to clean up. But from listening to the likes of Ben Bernanke they haven't figured out the Depression either.

  
  

  Published: June 5, 2008 6:49 AM

• fundamentalist

  DS: “I am having trouble imagining in the current global political environment how any central bank, much less all of them at the same time, will start contracting the world money supply.”

  Good post. I think it’s important to keep in mind that the Feds don’t have tight control of money. Businesses must cooperate with the Feds in order for the money supply to expand. If the Feds want to increase money but businesses refuse to borrow, then ask Greenspan used to say, the Feds are pushing on a string. As the malinvestment from monetary expansion becomes apparent, more businesses will go bankrupt, and then a dominoe effect starts. The money supply will collapse on its own as companies fail to pay back loans and banks quit granting new ones. This collapse can also be initiated by the Feds slowing the rate of growth of money by holding interest rates steady for a while.

  On the issue of whether oil prices represent a bubble or not, keep in mind that during the heyday of the housing boom, very few people were buying/selling houses. A small group of people were regularly flipping houses. In other words, it was speculation. But such speculation affects all housing prices because the prices of a commodity are set at the margin, that is, the last item sold. People who know only econ 101 are obsessed with supply/demand as the only explanation for everything, but they forget that econ 101 teaches marginal pricing theory. Maybe they didn’t understand the principal. Supply/demand effect long-term prices. Speculation, through marginal pricing, determines most short-term prices.
  

  Published: June 5, 2008 8:34 AM

• fundamentalist

  Rod: "How high do prices have to go before you guys stop believing your own BS?"

  Why do you think that supply/demand alone, nothing else, determines prices? What you call BS is core economic theory that has been refined for over 300 years. Clearly you don't know anything about economics but the supply/demand graph. So why are you so certain that economic theory is so wrong, when clearly you haven't bothered to learn any of it?

  Rod: "...it is the flow that counts."

  Nobody disagrees with that, so you can stop posting it if your getting tired. What we disagree with is what determines flows. Do you think the flow of oil is self-determining? If no reserves exist, no oil can flow. If large reserves exist, then the potential for oil flows to increase is good. If reserves exist at all, then flows can be increased through greater investment. If no reserves exist, then no amount of investment will increase flows.

  On the other hand, if no reserves existed today, that doesn't mean that no reserves will exist tomorrow. How do you think we got the flows we have today? By investing in the search for reserves. Reserves and flows are very tightly correlated. Oil can't flow from granite rocks; a pool of reserves must exist or no oil will flow.

  So I guess you're saying that if more reserves exist somewhere that we haven't found yet, the price of finding those reserves will be too high to justify developing the fields. You may be right, but I'm skeptical. We have searched for gold, copper and iron for millenia and are still finding more. We've searched for oil for little more than a century.

  You're right that few major finds have been made in the past 20 years. A few have been found. "But you're wrong that oil companies have spent much money on the search. Most oil companies shut down their exploration operations in the late 1980's and have spent very little on the search for new reserves. They only ramped up that search about two years ago when they decided the price spike might be long term.

  Historically, prices surged in 1973 (when Nixon took the dollar off the gold standard) until their peak in 1981, eight years, before they began to decline. This time it may take a little longer.

  Published: June 5, 2008 8:52 AM

• Paul Hunt

  Gold is usually proportional to the global economy. If the world experiences inflation then the price of gold goes up. Same if there is a case of deflation. And since oil pretty much determines the price of everything, gold is very closely related to oil. A great article called Peak Gold… $1,000 Gold… $2,000 Gold talks about how much Gold is going to be worth when it peaks and how to choose where to invest in Gold. Its very interesting and lends itself to this the above article and the discussion here. Thanks, Hope you all enjoy it.

  Published: June 5, 2008 9:10 AM

• newson

  ds says:
  "No, I don't see that happening tomorrow, but it will have to happen some day, and when it does the "peak oil" crowd will be holding dust."

  picking the top of the oil market is as fraught as making peak oil time-line predictions. unless you're calling and end to inflation, money is going to seek shelter in some asset class. property has all the debt attached to it, and the unwinding has years to go. going into a recessionary environment ain't great for the stock averages, so the commodities and precious metals, which still have almost no interest to the retail investor, are going to be enormous beneficiaries of asset-class shifting.

  i don't think the politicians will stop inflating voluntarily. they will fight until the entire monetary system is collapsed. zimbabwe tells me that can be an improbably long time. it's far more likely they'll criminalize hoarding and speculating in commodities, further worsening the situation

  Published: June 5, 2008 10:06 AM

• newson

  paul hunt says:
  "If the world experiences inflation then the price of gold goes up. Same if there is a case of deflation."

  wrong. gold is only an inflation hedge. think about it, in deflation, dollars gain value versus goods and services. in a non-convertible regime like the present day, gold would lose value.

  maybe it wouldn't do as badly as other asset classes as it offers protection from bank collapses and other counterparty risk, but the better alternative would t-bonds or t-bills, or even cash dollars under the mattress. i think you can rest assured that dr bernanke is going to make the deflation scenario only an academic exercise.

  Published: June 5, 2008 10:16 AM

• Rod Campbell-Ross

  Fundamentalist: Actually I have studied economics at a Masters level - not as a major though, and the course was called "Resource Economics" and was part of an Environmental MBA. We read people such as Herman Daly, Hartwick and Hotelling. I have a pretty good idea of what is going on. Economics was one of my majors in my B.Com, that I did some years back. Very Keynsian, but I have done some reading since, including Austrian principles.

  It is hard for an oil company to justify an exploration budget (I have also worked for Shell Expro) when the total value of oil reserves discovered in a year are less than the budget for that year. If you were a director, what would you do at budget time the next year?

  I agree reserves are important. Of course they are. But the size of the reserve is a very poor predictor of the production volume possible from that reserve. There is some relationship of course, but it is not distinct.

  Finally to turn full circle back to Harold Hotelling. He wrote that technology does not increase the reserve (of any non-renewable commodity), it merely hastens its extraction. The same is true for oil, so one important impact of our current situation is the newer fields such as the North Sea, Prudhoe Bay and Mexico's Canterell are all declining very rapidly, mostly at double digit rates. They were exploited using the latest and best technology, so they were drained very efficiently. However, when this is done and the resource peaks, production drops off a cliff - exactly as is happening. The struggle is to replace that lost production; and it is that, that cannot be ramped up fast enough.

  Published: June 5, 2008 5:17 PM

• fundamentalist

  Rod: "Actually I have studied economics at a Masters level...Very Keynsian..."

  Well there's the problem, then--Keynesian econ. Keynesians don't believe money has much of a role in the real world. Some claim it's endogenous. But I think if you'll read more Austrian econ you'll find that money plays the greatest role in business cycles and price inflation. Milton Friedman demonstrated that, and he wasn't Austrian.

  Rod: "The struggle is to replace that lost production; and it is that, that cannot be ramped up fast enough."

  No argument there. It may take another decade of searching to find significant new reserves. Then again, we may never find them. No one knows. But significant new discoveries have been found in the last 10 years in the Gulf of Mexico, Nevada, off the coast of Brazil and in the Caspian Sea. In addition, the reserves of Iraq and Iran haven't seen any modern technology in 30 years. Developing those fields will take many more years, but they show a lot of promise.

  No one is saying the price of oil will collapse soon. But the part of the rise that is due to monetary policy, perhaps half of it, could disappear very quickly when the Feds return to their sanity. At that time, the portion due to speculation will also vanish, leaving the price that is really due supply/demand imbalances.

  Published: June 5, 2008 8:15 PM

• fundamentalist

  PS, If it's any comfort, I have an MA in economics, all Keynesian. It's a wonder I can think at all! It took me years to unlearn that crap. After studying Austrian econ for three years, I think I finally have a handle on what real econ is all about. So I encourage you to hang in there and learn Austrian econ. It's worth the effort.

  Published: June 5, 2008 8:19 PM

• Deacon

  
  #######
  #######

  It's a bubble for this reason:

  
  Oil is payoff for the West's efforts
  at providing PROXY COMBATANTS
  for Israel--for protecting Israel
  from expanding, encircling Islamic
  Arabism; a Jewish nation-state
  having supporters throughout the
  West willing to destroy the entirety
  of Western civilization for Israel's
  sake.
  
  That's the gut-wrenching truth of why
  Western democracies are sacrificing
  blood and treasury in the Middle East;
  especially the U.S., which has enough
  off-shore and on-land oil reserves to
  last 300 years at her present rate of
  consumption, and which reserves were
  PURPOSELY capped and/or not drilled
  because Israel's supporters poured
  millions of dollars into ENVIRONMENTAL
  MOVEMENT groups' coffers, to work at
  keeping America from oil/energy
  independence and tied to Israel's
  interests in the Middle East.

  That's the truth you'll NEVER see nor
  hear reported in Western mainstream
  news media, because Israel's supporters
  control what's fit to be said or printed
  about why the West wars with
  Islamic Arabism.

  #######
  #######
  

  Published: June 6, 2008 5:55 AM

• Rod Campbell-Ross

  Deacon - not sure how you landed up here old chap.

  You should go and find your friends in the cospiracy theory blogs. You might find they are all hot linked to the UFO blogs, which in turn provide futher links to the Elvis is alive blogs.

  There are even some people there who saw Elvis alive in a UFO, but believe it has all been hushed up by a grand conspiracy, so you should feel right at home.

  Published: June 6, 2008 8:13 AM

• billwald

  >We define a bubble as the outcome of activities that have emerged on the back of the loose monetary policy of the central bank. In the absence of monetary pumping, these activities would not have emerged.

  Then the famous tulip bulb incident in Holland couple hundred years ago was not a bubble?

  The oil situation is not a bubble because the speculators never take possession of any product. Compare with the housing bubble. Speculators took legal possession of houses and condos, hoping to flip them in the near future.

  The oil trader has no use for the oil. He buys a contract to oil delivered to him at some future date. He has to sell the contract before that date or he is in big trouble unless he has a big back yard in which to keep his oil.

  You all forget that the commodities market was NOT invented to make money for anyone. It was invented to provide a source of raw materials for manufacturers at a known cost. It was invented to even out the cost of raw materials.

  
  

  Published: June 6, 2008 1:52 PM

• Rod Campbell-Ross

  Billwald is right - on all counts. What is also conveniently forgotten is that every trade has two sides. The buyer is banking on the price going up and the seller is banking on the price going down.

  Also, unless the buyer actually takes delivery he has to close the contract (sell). So, over any particular period there is a whole lot of buying and selling of paper. But that doesn't make it any more expensive unless actual product is short because people are taking physical delivery (like oil refineries). I would in fact ague that free market activity actually makes oil cheaper, which is another way of saying Shostak has really got it wrong.

  Hence the higher prices, some of which is monetary, but certainly not all.

  Published: June 6, 2008 8:16 PM

• newson

  to billwald:
  "Then the famous tulip bulb incident in Holland couple hundred years ago was not a bubble?"

  apologies if i have misinterpreted the above comment, but tulipmania did have its genesis in monetary disorder, though not fractional reserve banking. see this article for more:
  http://mises.org/daily/2564

  Published: June 7, 2008 3:40 AM

• fundamentalist

  billwald: "The oil situation is not a bubble because the speculators never take possession of any product. Compare with the housing bubble. Speculators took legal possession of houses and condos, hoping to flip them in the near future."

  And speculators in oil take legal possession of the oil, too. A futures contract is a legal contract to ownership a specified amount of oil. When the contract date is reached, the owner must accept delivery of real barrels of oil, or deliver real barrels of oil. Just as the speculators in housing didn't move into the houses they flipped, neither do the speculators in oil stack barrels of oil in their backyards. But they take legal ownership of the actual oil.

  A lot of oil is under long term contract. The oil being sold on the open market is not under contract, and so is being auctioned. It may be sitting in a storage tank in Cushing, OK, or on a boat. But the ownership of that oil can change hands multiple times in a day as speculators try to discern the direction of the price.

  As I wrote above, the price of oil in gold has risen by about 50% in the last 8 years. That fact indicates that not all of the rise in price is due to money. That 50% rise against gold points to supply/demand issues and speculation. It would be hard to separate out which is the greater factor. Some finance experts suggest that without the speculation and weaker dollar, oil might be trading at around $80/bl.

  It's interesting that the Dutch Tulipmania is so famous. It wasn't any different from any other mania in history, and it certainly wasn't the first. Braudel has some really good history on manias in Venice from 200 years earlier that were also caused by fractional banking.

  Published: June 7, 2008 11:07 AM

• Eduardo

  Billwald: "You all forget that the commodities market was NOT invented to make money for anyone."

  NO market has the purpose to make money for anyone. They ALL are for exchanging one thing for another.

  NO market was ever invented. They are the result of the division of labor. And the market place, in the physical way, was later established when it was perceived that it was advantageous to everybody that the exchange took place concentrated somewhere. Not all transactions happen in any single physical market.

  
  Rod: "Also, unless the buyer actually takes delivery he has to close the contract (sell). So, over any particular period there is a whole lot of buying and selling of paper. But that doesn't make it any more expensive unless actual product is short because people are taking physical delivery (like oil refineries). "

  One buyer WILL take delivery of the product, otherwise there will be a breach of contract. The buying and selling prior to it, was of a contract to deliver X amount of the product, which was settled at the begining.
  A producer contracts with somebody to deliver X amount of a product at certain date. This remains unchanged until it ceases to exist the day of settlement. This is what is bought and sold until the day of delivery.
  So, the physical delivery of the product will never make it short, it happens before. What makes less product available is the signing of the contract to deliver, which is when the whole supply of the product influences the price of the contract. All posterior buying and selling, only changes who receives the product, not when nor how much.

  Published: June 7, 2008 12:39 PM

• Bastiat

  @ Rod

  I don't think Peak Oil and Austrian Economics are incompatible. If you admit that fake government statistics, resource nationalism and NIMBYsm can cause Peak Oil, then you should also admit that the cause can still be removed; Peak Oil is no fatality if it is fabricated by human actions.

  I would even say that Peak Oil is some sort of permanent feature of the industry. Each time "conventional" oil is redefined to include what was previously "non-conventional", we can start a new cycle of waiting for the next Peak. Ultimately, renewable synthetic oil may be considered "conventional", and not "finite" in any meaningful sense. "Oil" defined this way will really peak when demand peaks, that's it. It will be a non-event as far as the average consumer is concerned.

  As far as gold mining requires oil, the oil price cannot rise significantly in gold terms, and would not in dollar terms if the dollar was linked to gold. That says a lot about how the current situation is really a monerary policy problem.

  Published: June 7, 2008 2:32 PM

• Walt D.

  Bastiat wrote:
  
  As far as gold mining requires oil
  
  This is not true - gold mining requires energy, not necessarily from oil. There was an oil embargo against South Africa, during apartheid. Gold mining went on. They used coal to generate electricity, and coal to produce synthetic fuel.
  

  Published: June 7, 2008 8:56 PM

• newson

  fundamentalist says:
  "It wasn't any different from any other mania in history, and it certainly wasn't the first. Braudel has some really good history on manias in Venice from 200 years earlier that were also caused by fractional banking."

  tulipmania was rather unusual in not being caused by fractional reserve banking, as the mises article i cited makes clear.

  Published: June 7, 2008 9:45 PM

• Rod Campbell-Ross

  I am not sure where the discussion is going.

  However I will leave it with a few principles:

  1.oil is important because of its energy contribution to society. It is not just a commodity, like others such as tin and orange juice.

  2. Conventional economics; including Austrian economics, is defficient because its theory is based on a number of flawed principles. It will continue to be defficient until it factors in the laws of thermodynamics (Ecological economics).

  3. Peak Oil is about flows of energy. It is convenient to substitute volume flows of oil, because these have historically approximated flows of energy, but that is becoming less true. Oil is increasingly found in more difficult places (eg Brazil/Tupi). Furthere tar sands, biofuels and other low net energy sources are being included in "oil" when they really are not crude oil.

  4. The economy is dependent on these flows of energy in ways that most economists, including Austrian economists, refuse to or cannot understand.

  There is a lot of noise in the space, a lack of reliable data and a large surfeit of emotion. The US is about to attack another country (Iran) because of oil; and so it is virtually impossible for people to understand what is going on. I would counsel people here to take the time to learn about oil, because it will teach you about how the world really works!

  Published: June 7, 2008 11:49 PM

• newson

  to rod campbell-ross:
  i think your points 1 & 2 are totally wrong. "ecological economics" - what is that? the austrian school eschews mathematical modelling of human behaviour. in referring to thermodynamics, perhaps you're speaking about the mechanics of energy production or extraction?

  points 3 & 4 seem to speak more to geopolitical and geological points, not economics. understanding economics doesn't mean understanding the the oil industry, but economics is not about forecasting future prices.

  back to the central posit - plotting the nasdaq vs gold chart prior to the top in 2000, and comparing this with the oil vs gold chart is illuminating. whilst oil has outperformed gold in the recent past, the outperformance doesn't in any way match a real bubble, clearly seen in the nasdaq/gold plot.

  Published: June 8, 2008 1:21 AM

• fundamentalist

  Rod: "oil is important because of its energy contribution to society. It is not just a commodity, like others such as tin and orange juice."

  So? No one said it wasn't important. But if you think the price of oil doesn't respond to changes in the money supply like other commodities, you're wrong. Oil cannot defy the laws of physics, and it cann't defy the laws of economics, either.

  Rod: "It will continue to be defficient until it factors in the laws of thermodynamics (Ecological economics)."

  You're simply wrong on that. Austrian econ does include the laws of thermodynamics where it is important to economics. It still amazes me that you're so confident in criticizing something you know very little about.

  Rod: "The economy is dependent on these flows of energy in ways that most economists, including Austrian economists, refuse to or cannot understand. "

  You go back to square one as if we hadn't discussed anything. I don't know of any economist, including Keynesians, who don't understand the importance of energy to the economy. Where in the world do you get such a stupid idea?

  Published: June 8, 2008 8:05 AM

• fundamentalist

  Just wondering which of the following laws of thermodynamics are important to the economics of the oil industry:

  The first law of thermodynamics ... states:
  “ The increase in the internal energy of a system is equal to the amount of energy added by heating the system, minus the amount lost as a result of the work done by the system on its surroundings."

  "The second law of thermodynamics is an expression of the universal law of increasing entropy, stating that the entropy of an isolated system which is not in equilibrium will tend to increase over time, approaching a maximum value at equilibrium."

  "The third law of thermodynamics is a statistical law of nature regarding entropy and the impossibility of reaching absolute zero of temperature. The most common enunciation of third law of thermodynamics is:
  “ As a system approaches absolute zero, all processes cease and the entropy of the system approaches a minimum value."

  "In thermodynamics, the fundamental thermodynamic relation is a mathematical summation of the first law of thermodynamics and the second law of thermodynamics subsumed into a single concise mathematical statement as shown below:
  Here, E is internal energy, T is temperature, S is entropy, P is pressure, and V is volume."

  Published: June 8, 2008 8:32 AM

• Bastiat

  As an engineer in the environmental disciplines, I can testify that ecological economics is a fashionable brand of pseudo-economics containing a lot of thermodynamic nonsense.

  The true facts are:
  1) thermodynamically available energy (exergy) is abundant, including at least 10^24J hydrocarbons, 10^30J deep geothermal, and 10^38J total. Plus 86 million gigawatts incident solar radiation;
  2) the minimum work required from thermodynamics to extract a metal from randomly chosen rocks and/or seawater is not particularly high compared to rich deposits. The difference is usually less than 50kJ/mol even for metals found in ppm amounts; and
  3) what is scarce about energy is the human talent required for the long-term development of resources, of which the proper allocation is what economics is all about

  @ WaltD

  "[South African Gold miners used] coal to produce synthetic fuel." - Very true

  Hence the possibility to produce synthetic fuel puts a long-term backstop on the gold-price of oil, which is my point.

  Published: June 8, 2008 11:23 AM

• fundamentalist

  Bastiat: "I can testify that ecological economics is a fashionable brand of pseudo-economics containing a lot of thermodynamic nonsense."

  So what are the ecological economics guys claiming, that the market doesn't properly price oil because oil is more scarce than people realize?

  Published: June 8, 2008 1:27 PM

• Bastiat

  @ fundamentalist

  Ecological economics started with the ideas of a soviet economist who thought that because industry converts available energy into waste heat, it is somehow unsustainable, and therefore that iron would be better spent making spare hand shovels for future generations. You can start with http://en.wikipedia.org/wiki/Nicholas_Georgescu-Roegen

  I guess that oil would indeed be mispriced, since it does not factor in some sort of future divine punishment for having released too much entropy into the environment. Of course, it is all nonsense since excess entropy (waste heat) is harmless and simply radiated to outer space.

  Since then ecological economists have switched focus on mispriced "ecosystem services", but of course without ever noticing how property rights are a central issue to the topic, since socialism under their wisdom has to be the only acceptable solution.

  Published: June 8, 2008 3:27 PM

• fundamentalist

  Thanks for the explanation, Bastiat. I had some time to kill this afternoon and did some web surfing on the subject and came to a similar conclusion. Rob is trying to sound very scientific with his insistence on including thermodynamics, but the whole thing is nothing but socialism in scientific drag. Check out some of these comments from http://greenpathresearch.com/id15.html.

  "Daly and Farley go quite a big step further:

  What ends do we desire
  What limited or scarce resources do we need to attain these ends
  What ends get priority and to what extent should we allocate resources to them.
  This is what economics should be about. With the traditional question, there is already the assumption that production of goods and services is the end we desire."

  [But the author never indicates who will decides the answers to his questions. Austrian econ says individuals should be free. Environmentalists think they should dictate the answers to the rest of us.]

  "5) Steady-state economy.

  What is the steady-state? Idea is to maintain constant stocks of wealth and people at level sufficient for a long, good life. Throughput for maintaining stocks has to be low and within the re-obsorptive and regenerative capacity of the environment.

  Nicholas Georgescu-Roegen argues that, as we rely less and less on current solar energy and more and more on fossil hydrocarbon and other mined resources, economic activity needs to be understood as moving toward a closed system and subject to the second law of thermodynamics.

  i.e. economic activity as an entropic process - takes high quality energy and materials and reducing them to waste heat and dispersed minerals.

  Looking at new technology from this perspective, we see that it allows economic activity to accelerate, for entropy to increase faster, leaving less for the future, not more.

  Thus, to the extent that we rely on stock resources, especially of energy, progress is not possible, indeed even sustainability is not possible. The alternative, of course, is to return to relying on current solar energy, in part by working with natural systems. This, however, raises further issues.

  Humans are co-opting approximately 40% of the primary energy captured by terrestrial ecosystems. Ecological economists use this study as an indication of how human activity has transformed the environment and as an indicator of the limits to further transformation. For Herman Daly and other ecological economists, the analysis of Vitousek et al stresses the urgency of moving to a steady-state while there is still some margin left.

  Mathis Wackernagel and William Rees (1996) have used biophysical analysis to calculate the "ecological footprint" of a population, the area of productive land and water ecosystems needed to produce the resources it consumes and assimilate the wastes it produces.

  [This is the old sustainable development nonsense. No one knows how much oil exists on the planet, but the environazis are going to tell us how to distribute it "fairly" around the planet today and between the current generation and future ones.]

  6) Focus on future generations and just distribution.

  What is link between sustainable scale and just distribution? Economist posit that increased growth will take care of distributional problems - there will be more pie for all. But if continued growth is not possible and we are actually at a point of uneconomic growth, consumption by wealthy is decreasing ability of poor to subsist.

  Also, as we use up resources, we decrease what is available for future generations.

  If we are to care about future generations, we need to also care about present generations.

  EE is concerned with scale and distribution FIRST and efficient resource allocation later because efficient allocation can not be determined until scale and distribution are determined (think of island metaphor). If you scale up you can not keep the same distribution. Distribution determines allocation. "

  The rest of the site is just more socialist foaming at the mouth madness.

  Even mainstream econ takes thermodynamics into account by acknowledging that as resources become more scarce the price rises and forces conservation of scarce resources. When the price reaches a threshhold, entrepreneurs introduce new techologies at lower prices to replace scarce ones. Capitalism integrates real meaningful conservation.

  A good example is the switch from whale oil as a source of lighting in the early 1800's to petroleum. Increased usage threatened whale populations and made whale oil scarce and expensive. That spurred research for alternatives and produced the petroleum industry. As petroleum becomes more scarce, its price will rise to the point that people switch to alternatives or change their lifestyles.

  The only difference between real economics and ecological economics is who will make the decisions. Will individuals freely decide through the market, or will some socialist thug force his choices on the rest of us?

  Published: June 8, 2008 5:29 PM

• Rod Campbell-Ross

  Fundamentalist - you have been doing a lot of good reading. No one says you have to agree with it - but there are other points of view. I do not agree with all of that, though the parts on entropy make sense; and I am always in favour of individual choice.

  However I find my self torn between this view of the world and the knowledge that we as a species are in overshoot. Overshoot is an ecological observation of the impact of a popluation outgrowing its resource base. As a simple example of overshoot do a Google search on "St Matthews island" and "Reindeer". It is extreme, but the population chart of that event (up to the peak); and the human population chart bear distinct similarities. Will humans suffer the same fate? Are we really smarter than those Reindeer?

  The cutting edge of the human resource dilemma is oil, hence my interest. It is also the source of my disdain for economic explanations of current oil production. Economics explains production well in the discovery and increasing production phase, but has fallen apart completely in the depetion phase, where we are now.
  
  There is a lot of noise in the press, internet and blogoshere about oil prices. This ranges from comments by the idiotic Australian Prime Minister, Kevin Rudd, who wants to blow-torch OPEC, to the more considered on web sites such as theoildrum.com.

  The following is adapted from Euan Mearns comments on North Sea Oil production on theoildrum.com today. This is the reality of the problem and it is world wide.

  Technology has allowed the oil industry to become very discerning about what they drill. Inverted seismic data and controlled source electromagnetic imaging actually allows companies to image oil and gas in the sub-surface - they can actually see the stuff. This makes companies much more risk averse to drilling. In the old days it was a gung ho approach. Today its much more sophisticated. Even with this technology, decadal discovery indicates there is very little left to find and it costs a fortune to drill it.

  The huge but rapidly depleting inventory of high eROI (energy return on energy invested) oil and gas is subsidising todays E&P effort. The real energy costs involved are hidden. No one knows the energy balance of satellite field developments with long reach horizontal wells linked back to a massive steel jacket platform producing just a dribble compared with its design capacity.

  This is the sort of work that government agencies should be funding with some urgency (because no one else will). Taxation and decommissioning costs also distort the picture. Companies will do anything to defer the costs of decommissioning large offshore structures. This is where energy economics and conventional economics collide.

  No doubt we are using more and more energy to produce energy and the share of GDP assigned to energy production is escalating, but hidden and unknown. Bring on the ecologists to explain the consequences of this for society.

  In addition no one knows what the impact of declining energy will be on our economies, because it hasn't happend yet. Rome, the Mayan culture and many others provide some historic glimpses of what happens when a large society outgrows its resource base. But none of those have been global; or modern.

  I sense that we should be trying to anticipate it; and I am also concerned that the markets are ill equipped to deal with it. Anyway, I suspect that if there are major problems that they will start in the capital and equity markets.

  Published: June 8, 2008 9:39 PM

• TLWP Sam

  Yeah I s'pose you're right fundamentalist. Humans will adapt one way or the other with regards to Peak Oil. I'm sure Libertarians wouldn't make a promise that progress is necessarily upward and sustainable. It's quite possible that there's no economical replacements for that which was supplied by oil and we have to go back to horse & buggies and small family farms. But then so what? The great empires of times past didn't have electricity nor computers and did fine. Not to mention the shining examples of real-life 'Libertarian societies' were low-tech ones too.

  Published: June 8, 2008 10:35 PM

• fundamentalist

  "The real energy costs involved are hidden. No one knows the energy balance of satellite field developments with long reach horizontal wells linked back to a massive steel jacket platform producing just a dribble compared with its design capacity."

  "No doubt we are using more and more energy to produce energy and the share of GDP assigned to energy production is escalating, but hidden and unknown."

  I seriously doubt that no one knows these things. And even if they didn't, oil companies would have to catch on very fast or go broke.

  Rod: "In addition no one knows what the impact of declining energy will be on our economies..."

  I don't think that is true. There isn't any economist who doesn't appreciate the role oil plays in our economies. Worst case scenario: oil runs out completely in 10 years; not another drop to be found. No alternatives in the wing. Nuclear and hydrogen are busts. We can't grow enough corn or switch grass for alcohol. All coal is off limits due to environmental concerns. What would happen?

  People will starve to death by the millions. We will have to revert to animal power for farming and transportation. As in the 19th century, 40% of all farm land will have to go to raising food for those animals. Farm productivity will plummet to third- world levels and will be unable to support the non-farm labor we have today, so most people will have to learn to farm just to feed their families.

  But what good does dwelling on worst-case scenarios do? They're nothing but horror shows intended to keep the gullible coming back to watch TV news. A more likely scenario is that nuclear energy and coal will fill the gap left by oil, but oil has quite a ways to go.

  Besides, even if my worst-case scenario were the most likely, what could anyone do about it? Nothing. A free market would ensure that the last drop of oil went to the most important use. Anything the state did to stretch out the oil supply, as the ecology economists want, would make everything worse and breed corruption. Does anyone really want the people who brought us the Iraq war and the Katrina rescue to be in charge of managing our energy future?

  Ecology economists create a horror story about the future, but I haven't seen any concrete proposals from them, just vague ideas about sustainable development and sharing resources with the future. How do you accomplish those without having some international agency, like the UN, take over all natural resources in the world? Keep in mind, this is the same UN that botched the food-for-oil program in Iraq before the war and accomplished little more than making a bunch of thieves in the UN rich while Iraqis starved to death.

  I've witnessed how well socialism protected the environment and natural resources in Eastern Europe, the Soviet Union, China, Cuba, and North Korea. I'll take my chances with a semi-free market, thank you.

  Published: June 8, 2008 10:42 PM

• newson

  rod campbell-ross says:
  "Rome, the Mayan culture and many others provide some historic glimpses of what happens when a large society outgrows its resource base."

  well, having been to tikal, and spoken to maya experts, there is a variety of hypotheses about what spelled their end, and no smoking gun.

  as for the romans, look rather at their welfare/warfare state. the bread dole was the political third rail, even in those days. unfortunately we've got rid of the circus, but you can hear nero's lute in the background. resources are not likely to have been the cause of rome's downfall - you can plot the fall of empire by looking at the monetary debasement of the denarius (milked as a surrepticious means of covering fiscal profligacy) interesting that the byzantine roman empire lasted so much longer, and that there coinage was not debauched. coincidence? the invading "barbarians" trusted gold and silver, and so were able to purchase arms and essentials (when pillage alone wasn't possible), when there was great reluctance to accept roman currency. here's an austrian angle on roman inflation:
  http://mises.org/daily/639

  Published: June 8, 2008 11:12 PM

• newson

  one other thing on the environmentalist mentality, which tends to centre around the duty to leave something for the next generation.

  this sort of reasoning is insidious, should i starve that some future person might eat? on what moral grounds? why is my life worth any less than some future person?

  even on utilitarian grounds this is nonsense, someone less disposed to future generations will profit from my sacrifices and bugger the rest. so we need coercive means to stop this selfishness.

  not only that, but this mindset foments intergenerational warfare. in the papers the pensioners attack the young who receive unemployment benefits, and the young resent "grey" offsets for utilities, healthcare, pensions etc.
  the only reliable mechanism for passing on our good lifestyle is via strict integrity of property, and no testamentary imposts.

  even those without children of their own, carefully dispose of assets to loved-ones or charities.

  as a peak-oil aside, i might be more inclined to optimism if i could see iraq and iran opening up their oil-patch to foreign explorers/producers, but i think the chances of this are miniscule. the politics of oil are far less tractable than the geology/engineering aspects.

  Published: June 8, 2008 11:32 PM

• Rod Campbell-Ross

  We can discuss these things ad-infinitum. Ultimately we can choose to disagree.

  Your worst case scenario is not on the cards - not even remotely; and we will never run out of oil.

  My immediate concern is the impact of high oil prices on the capital markets.

  Over the longer term my concern really is overshoot. Humans rely on energy in a very precise way and the quality is vital. We need food energy, transport energy (mainly oil) and we need stationary energy (mainly electricity). All three are currently stressed and the stress is to a great degree related. A very significant portion of our economy is bound up with these three activities.

  As we have built on efficiency in the delivery of these products, so we have also built in complexity and eroded resilience. With over half the world now urbanized and reliant on this energy and complexity what can we say about the resilience in these systems? To what extent can our economies adjust to declining energy availability and very high prices; and how fast?

  As has been demonstrated in this discussion this is an enormous topic; and one that is exceedingly complex. I certainly do not claim to have any answers. I seriously doubt the market does either, though in theory it should provide the best outcome.

  In practice in will never be allowed to because governments will take control and make a bad situation even worse.

  Published: June 9, 2008 12:45 AM

• newson

  to rod campbell-ross:

  i think we can safely agree that prime minister rudd's fuelwatch is not going to bring down the oil price. i live in western australia, where this useless office has been pioneered, found wanting, and therefore deemed fit to be rolled out nationally. at least we have no shortage of buffoons.

  Published: June 9, 2008 3:20 AM

• fundamentalist

  Rod: "To what extent can our economies adjust to declining energy availability and very high prices; and how fast?"

  That's a very good question. I don't think anyone knows. Best case scenario is that oil runs out gradually so that the price climbs steadily. In that case, the transition will be relatively easy. If we get a major shock, things will be very difficult for a long while.

  An article in The Economist last month suggested that everyone find a piece of land that they could get to quickly to raise their own food on. At the time, I thought the author was a bit hysterical. I'm not so sure now.

  As for the capital markets, I wouldn't worry so much about what oil is doing to them as what the Feds are doing. The Feds seem intent on destroying the capital markets.

  You may have noticed that oil took a plunge last month when it seemed clear that the Feds wouldn't lower interest rates again but might raise them in order to fight inflation. Then, when the jump in unemployment was reported, oil took a huge jump again. Apparently, speculators think that the Feds are still playing Lone Ranger for the economy and will lower interest rates yet again. Let's all pray they're wrong.

  Published: June 9, 2008 8:03 AM

• fundamentalist

  Rod: "In practice in will never be allowed to because governments will take control and make a bad situation even worse."

  What do you think the screams for sustainable development and fair distribution of resources is all about? It's a push for socialism. Today, something like 80% of all oil in the world is owned by states. I don't think the time is far off when states attempt to take over the remaining 20%.

  Published: June 9, 2008 8:13 AM

• Paul Johnston

  You (economists of the Austrian school) insist that money creation, not peak oil, is causing the price of oil to rise.

  Maybe. Maybe not. We don’t know yet.

  I have to say this, however: I am surprised at the tenor of your arguments. You (Austrian folk) convey the impression that you are trying to salvage a position, not understand what is going on.

  My reading of the situation is that the direction of causation goes the other way, i.e., loose money is not leading to high oil prices but the other way around, scarce oil is leading to loose money.

  To unpack my reading just a bit, it seems to me that we are living through a change of regime. The old regime was a centuries long decline in the marginal cost of energy. The new regime is one in which the marginal cost of energy is rising. The cause of the change is the peaking of the huge, old, oil fields and provinces (Ghawar, Cantarell, Daking, the North Sea, Samotlor, East Texas, etc etc). The process is slow, “macro” as heck, has been going on since the 1970s, and is now beginning to stress the system big-time.

  In the USA, political authorities don’t have a clue what is happening except this: they sense fragility in the system. Their response is labor arbitrage and leverage, the path of least resistance. This has worked so far to keep the middle class more or less middle class, but isn’t, as they say, “sustainable.” Meanwhile, under the surface, what is really happening is the emergence among us of a standard third-world system, otherwise known as crony capitalism.

  Money in this system is not an independent variable, so why put so much importance on it. Much more useful is the old Lenin dictum: who, whom. Who is doing what to whom?
  

  Published: June 9, 2008 8:28 AM

• Rod Campbell-Ross

  Fundamenatlist: "What do you think the screams for sustainable development and fair distribution ....."

  I am not sure socialism is back on the agenda. Even supposedly socialist parties such as Labour, now in power in the UK and Australia, cannot be labelled socialist in the 1960's sense of the word (thank goodness). Globalisation has seen to that.

  It is likely governmments will take control of oil, wherever it exists,but as you say 90% (not 80) is in the hands of government any way. Fields which are not in government control are likely in decline in any event.

  On the other hand, maybe it is all just a bubble that will pop taking oil back down to $20. Then we can go back to the good old days, buy a Hummer, GM will be profitable again and we can enjoy cheap flights to crappy tourist holes for ever.

  Published: June 9, 2008 8:40 AM

• fundamentalist

  Rod: "I am not sure socialism is back on the agenda."

  As Mises wrote, there are two types of socialism, the Russian and German. Russian socialism nationalized all industry and made it state-owned. German socialism allowed owners to retain the paper title to ownership, but controlled every aspect of the business. The German kind is dishonest, but very popular. It makes people think they still have private property, but they lack any of the benefits.

  Rod: "On the other hand, maybe it is all just a bubble that will pop taking oil back down to $20."

  It will never return to $20. The damage caused by Fed monetary pumping has been done. Even if it stopped today, which it won't, the higher level of money has raised prices permanently. However, the part of the price increase that is due to speculation will go away when the Feds return to a sound mind. It mind go down to $100/bl. but not in the near future.

  Published: June 9, 2008 9:14 AM

• Michael A. Clem

  This is so puzzling--economics is deficient in understanding energy? Even mainstream economists understand the idea of supply and demand, and energy is something that people supply and demand, like any other good or service, even energy provided by oil. How much more 'understanding' does economics need?
  
  More importantly, assuming, as fundamentalist did, a worst-case scenario, and we run out of oil (or at least drastically increases in price), then what? You're still facing the same basic politico-socio-economic question that we face every day with every other resource that humans use: do we allocate it via voluntary exchange (the market place) or via command-and-control regulations and interventions (regardless of any specifice form such regulation takes)? Even Rod indicates that he thinks we are worse off with governments handling the situation, though he seems to think it's inevitable.
  
  The freedom of the marketplace provides the best incentives and best hope of improving energy efficiency and energy development, oil or no oil. Whether you believe oil is some magical and unique commodity or not. So just exactly WHAT are we arguing about here??

  Published: June 9, 2008 10:08 AM

• Walt D.

  It seems we have two types of problems in the energy industry.

  Technical problems such as we don't know how to produce a sustainable break-even fusion reaction, or we don't have the technology to use the methane or hydrogen from the moons of planets or the planets themselves in the outer solar systems.

  Political/psychological problems. Even though we already have the technology, we don't have a stable enough political structure in the US to build modern nuclear power plants to replace obsolete coal plants, or to build refineries to turn coal into diesel fuel.

  My contention as to why the latter is so is due to a breakdown in the education system. In particular almost complete economic illiteracy. I would guess than less than 1 person in 10,000 understands the basic operation of the Federal Reserve System - something that is easily available on this site.

  Published: June 9, 2008 10:18 AM

• newson

  rod campbell-ross says:
  "Even supposedly socialist parties such as Labour, now in power in the UK and Australia, cannot be labelled socialist in the 1960's sense of the word"

  i think fundamentalist is on the money here, the socialist parties have changed their rhetoric, but remain wedded to the central planning model. the really shocking change is way the conservative parties, too, have become increasingly socialistic, but with a tinge of khaki nationalism. i cannot even remember the last time a conservative government in the western world left office with fewer public servants on payroll. even thatcher and reagan failed on this criteria, howard in australia presided over a vast rise in public service numbers, grew the statute books enormously, and presided over one of the greatest centralizations of power in our federation's history.

  Published: June 9, 2008 10:21 AM

• newson

  paul johnston says:
  "Money in this system is not an independent variable, so why put so much importance on it."

  "Give me control of a nation's money and I care not who makes it's laws."-- Mayer Amschel Bauer Rothschild.

  mind you, lenin, too, understood the critical importance of a state-run central bank in the socialist platform.

  Published: June 9, 2008 10:37 AM

• fundmentalist

  paul johnston: "Money in this system is not an independent variable, so why put so much importance on it."

  That's the Keynesian view. Mises points out that even Keynesians who think money is not an independent variable (it's endogenous in econ speak), admit that a rapidly growing money supply is absolutely necessary for price inflation to occur. So even Keynesians admit that monetary inflation is necessary to price inflation, but not the cause.

  So what do they think the cause might be? Shocks! Or in laymen's terms, acts of God. That sounds less like an explanation and more like a description. Thanks, but I'll stick with the Austrian explanation.

  Published: June 9, 2008 11:13 AM

• Paul Johnston

  Fundamentalist: “.....even Keynesians who think money is not an independent variable (it's endogenous in econ speak), admit that a rapidly growing money supply is absolutely necessary for price inflation to occur.”

  Who said anything about price inflation not being linked to a rapidly growing money supply?

  Not me.

  My point is almost too simple. When it comes to inflation, ask one question: cui freaking bono? Who benefits? The people who want inflation get what they want. They get it because they have the power to get it. How they actually go about getting it is a mildly interesting question. Maybe they read von Mises, and come away with clear ideas about what happens when you hose the landscape with purchasing media.

  Actually, my guess is that inflation for these crony capitalists is more or less a side issue, a not too difficult to handle result of lucrative manipulations in the realm of finance, government regulation and insider dealing.

  Now, to be sure, stopping money creation would stop inflation. Big deal. This is a trueism. Money creation is not an economic problem. It is a political one, or worse. By this I mean: to break the power of the FED by instituting a money regime based on gold, or based on some variant of a gold standard (or based on any arrangement that would take power over money away from the center, i.e. from consolidated government and crony capitalists) would require an appeal to arms.

  Economic talk might help in the formation of coalitions of outsiders against insiders, but as a general rule, it seems to me that economic talk is too unconnected to the human heat, too abstract, to get us to go out there and lay it on the line.
  

  Published: June 9, 2008 12:24 PM

• flow5

  Shostak is right:

  And so is Friedman: "inflation is always and everywhere a monetary phenomenon".

  Some people prefer the devil theory of inflation: “It’s peak oil’s fault.” This approach ignores the fact that the evidence of inflation is represented by “actual” prices in the marketplace. The “administered” prices of the world’s oil producing countries, would not be the “actual” market prices, were they not “validated” by (MVt), i.e., “validated” by the world’s monetary authorities.
  

  Published: June 9, 2008 12:28 PM

• Carl

  Here's a cool post that graphically shows how significantly less Buy Programs in the Crude pre-market can lift the market as much as when large amounts of Buy Programs enter Crude when the pits are open.

  http://www.transactionlevelanalysis.com/2008/06/when-does-the-smart-money-make.html

  Hope that you find this interesting.

  Published: June 10, 2008 7:12 PM

• newson

  to carl:
  sure, there's a lot of noise in trading markets, but ultimately fundamentals dictate price, not technicals (which may or may not be useful, depending on interpretation).

  Published: June 10, 2008 7:42 PM

• Anon

  Does anyone know of any studies of the impact of monetary prices on inflation during the two oil shocks of the 1970s? Specifically, did countries with tight monetary policies experience lower inflation and fuel prices than others?

  Published: June 11, 2008 2:33 AM

• newson

  this from gerry jackson of brookesnews.com, 18 april 2005:

  "If those who push this line were right about the 1973 oil price hike causing inflation then the biggest oil importers would have had the highest price hikes. They did not.
  For example, Germany and Japan are wholly dependent on oil imports, but after the price hike German inflation was only 7 per cent but Japan’s was 25 per cent. Australia, which was 75 per cent self-sufficient in oil, had an inflation rate of 17 per cent; America, which imported about 50 per cent of its oil, suffered a 12 per cent inflation rate; Britain, which had become a large oil producer, laboured under a record 25 per cent inflation rate; Saudi Arabia, the world’s largest oil exporter, saw its inflation shoot up to 35 per cent.
  The view that oil prices caused inflation can not stand against the facts, which brings us to more facts. Those countries with the lowest rates of monetary growth enjoyed the lowest inflation rates. Take Britain and Japan as examples:inflation in Britain rose to 24 per cent and the money supply ran at over 25 per cent; Japan’s 25 per cent inflation was preceded by a 25 per cent monetary expansion. "

  Published: June 11, 2008 10:09 AM

• sohbet

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  Published: August 31, 2008 6:54 AM

• disgusted voter

  According to a large number of media types, it was all Bush's fault that oil was $145 a barrel. If he was to blame for high oil prices, does he get cudos for $95 a barrel oil? Where are they now?

  Published: September 15, 2008 3:49 PM

• partner

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  Published: September 29, 2008 12:09 PM

• Liliannag

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  Published: October 16, 2008 1:48 PM

• Uncle Bob

  Hi
  

  Published: November 7, 2008 8:39 AM

• penisbüyütücü

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