February 24, 2011
Charles Maxwell: Gradual Adjustment To Peak Oil?

79 year old oil economist Charles T. Maxwell tells Barrons that he's sticking with his prediction of $300/barrel oil ($225 adjusted for inflation) by 2020. Maxwell expects only an additional 3-4 million barrel per day increase in production capacity before peak. The most hopeful comment: his view that a gradual price rise doesn't have to cause a huge economic downturn.

At what point do those price increases start to put too much pressure on the world economy?

Strangely enough, I don't think that it would bring the economy down. Rather, it is the suddenness of change that does that. That rise we saw three years ago, where in one year it went from $62 a barrel on average to $100, created a huge amount of economic damage. On a more gradual scale, and giving the effect of inflation its due, we will probably simply walk away from two-tenths or three-tenths or four-tenths of a percentage point of potential gross-domestic-product growth, which we will give up by being caught in this energy vise. But the world economy will advance, and it won't be brought down by this.

But so far what we've seen very high oil price volatility in recent years. If that high volatility continues then gradual adjustment with minimized economic impact doesn't seem to be in the cards.

High price volatility seems the more likely scenario. Why? For one, it is what we've seen so far. Peak to trough oil dropped by over $100 per barrel from July 2008's $147 peak to early 2009. Now oil has shot back up over $100. That's partly due to revolution in Libya. But oil had more than doubled from its bottom of a couple of years even before governments started falling in North Africa.

Each oil price spike helps cause an economic recession which lowers oil prices. Then comes recovery which increases demand and cause an oil price spikes. In a world of slow oil supply growth oil becomes a rate limiting factor on economic growth. Then the prospects for oil price spikes seems greater. Worse yet, Gail Tverberg argues financial crises will amplify the problems caused by Peak Oil with debt defaults undermining the ability of companies to invest in capital that reduces our reliance on oil. In light of these considerations it seems unlikely oil prices will send signals to the market to do a gradual smooth restructuring away from oil consumption.

Maxwell expects to see a peak from 2015-2017 and then a decline after that. But peak consumption in the West happens earlier for a couple of reasons. First off, peak exports happens before peak production because oil consumption is rising more rapidly in oil exporting nations. Many big exporters subsidize internal consumption (e.g. Saudi Arabia, Venezuela, Russia) and their oil revenues raising living standards and increase buying power. Second, rising Asian demand leaves less of the exported oil available for import by Western countries.

Share |      Randall Parker, 2011 February 24 08:54 PM 


Comments
john personna said at March 1, 2011 6:04 AM:

It's both interesting that you cite the $200-300/bbl predictions, and then say that prices have been highly volatile.

I'd call it moderate volatility at best, and suspect that the rate of increase we say 2004-2007 is about what we get, given economic growth and social momentum. People have been "calling" $200 oil off and on for 5 years. It doesn't happen because consumption has fallen with each price hike. Miles-driven falls in the US. Other more planned economies reduce purchases.

People are weird. Gave they been more aggressive toward my Prius in the last few days, because they think this gas price is my fault? Or because they worry I might be smug? I tell you, weir attitude toward "Prii" as gas prices approach $4 might be enough to MAKE me a little condescending.

... I think I'll run up to Death Valley this week for some camping. I figure it should be empty, with all the formerly smug RV owners staying home.

john personna said at March 1, 2011 6:07 AM:

Sorry for the mistypes above. I should be more patient on preview.

Nick G said at March 1, 2011 11:26 AM:

Substitutes (including what we might call conservation measures) generally cost less than $100 per barrel, so I don't expect to ever see inflation adjusted prices stay above $150 for an extended period.

Chris T said at March 1, 2011 1:26 PM:

The link between oil price spikes and recessions isn't all the clear actually. They definitely tend to precede them, but causality is much harder to establish.

http://www.sais-jhu.edu/bin/u/r/R_Oil_and_the_Macroeconomy.pdf

Randall Parker said at March 1, 2011 7:44 PM:

john personna,

A July 2008 high of $147 per barrel to a December 2008 low of $32 seems pretty volatile to me. I am wondering how steep the drop will be next time around.

Nick G,

Why I think oil can go higher: Asian economic growth will add on a lot more buyers even as Western buyers shift toward lower oil lifestyles including smaller, hybrid, and electric cars and less driving. Basically, the market demand will be spread across a lot more people who, in the quantities they'll buy, won't be as price sensitive as a Chevy Suburban driver. The wider base will serve as the foundation to support higher prices.

Chris T,

Higher oil prices slow down economic growth for at least 2 reasons:

- Money spent on oil is money not available to buy other stuff.

- Substitutes and more highly efficient equipment cost more. Use less oil as an input to production and then other inputs must be used in larger amounts. So the cost of economic growth rises.

Chris T said at March 1, 2011 8:28 PM:

Higher oil prices slow down economic growth for at least 2 reasons:

Right, but would an oil price spike have happened in the first place if the economy wasn't already moving towards a recession? Remember, the housing bubble had already burst before the run up in commodities.

Randall Parker said at March 1, 2011 10:39 PM:

Chris T,

The commodity price run-up occurred over several years. It did not start after the housing bubble peaked in 2005-2006. Look at the price of oil starting from Jan 2003. The price in late summer 2005 was over double what it was at the start of 2003. Well, the price at the start of 2003 was double what it was 5 years previous. Or check out the price of copper as the housing boom raged. Plus, gold's run-up starting around 2002 still hasn't ended.

The oil price spike was driven by rising demand in Asia and in oil exporting countries. The spike made our downturn worse.

john personna said at March 2, 2011 5:28 AM:

Randall, you say "seems pretty volatile to me" and I remember my parents sending me down to fill up the cars on even-odd days ;-)

Kralizec said at March 2, 2011 9:29 AM:

I would like to find an analysis of the oil-exporting countries' dependency on imported foodstuffs. Given that farming and transportation require energy, it seems the oil-exporting countries' populaces' reported sloppiness with their oil will keep them poor and eventually make them first hungry, then dead.

Chris T said at March 2, 2011 10:16 AM:

The commodity price run-up occurred over several years. It did not start after the housing bubble peaked in 2005-2006.

This is indeed true, but the rise was fairly steady until 2007. The real danger oil presents to the economy is not steadily rising prices, but an extremely rapid increase like the one we saw in 2007. I don't see that happening without all of the other problems rocking the economy at the time.

The spike made our downturn worse.

That I agree with.

Nick G said at March 2, 2011 6:20 PM:

Asian economic growth will add on a lot more buyers even as Western buyers shift toward lower oil lifestyles including smaller, hybrid, and electric cars and less driving. Basically, the market demand will be spread across a lot more people who, in the quantities they'll buy, won't be as price sensitive as a Chevy Suburban driver. The wider base will serve as the foundation to support higher prices.

I can see that to some extent: Europeans are willing to spend $7 per gallon on fuel, at a consumption level of 18% of that of USers.

OTOH, Europeans are fairly affluent. France, for instance, has a lower per capita GDP than the US, but if you adjust for hours worked....they make as much per hour. They just choose to have more leisure. Probably the rational thing to do.

Chinese are going to be more sensitive to prices than Europeans; and worldwide sales of alternatives are going to drive economies of scale.

ohwilleke said at March 3, 2011 9:07 AM:

Volatility seems like a good way to produce a gentle transition as opposed to a collapse.

Price spikes encourage bursts of technological development and alternative energy investment. Price busts prevent the price spikes from producing too much medium term pain and give the transitioning economy and R&D efforts breathing room to catch up with the longer term trend. Lots of technology that is finally ripe to make transitions away from oil today is a result of R&D investments that were made due to the temporary price spike during the OPEC oil embargo of the 1970s.

Similarly, variation in retail gasoline prices in the world, from highs in places like Europe and Japan at double U.S. prices, due to policy differences, make it sensible for some places to develop new technologies without imposing undue pain in the Third World and U.S.

In said at March 3, 2011 12:20 PM:

Each oil price spike helps cause an economic recession which lowers oil prices. Then comes recovery which increases demand and cause an oil price spikes. In a world of slow oil supply growth oil becomes a rate limiting factor on economic growth.

On the bright side each price run up no doubt forces some people/businesses to make adjustments (e.g. move closer to work, start a car pool, buy a smaller car) that make them less vulnerable to the price of oil in the future. So in theory price spikes should have less bite over the coming years.

It would be interesting to have more data on the effects of marginal adjustments and improvements on efficiency. I once calculated, based on data that IIRC I got off the epa web site, that the US vehicle fleet is improving in gas mileage on average about 1mpg per year for the past few years. If the average mileage is say 25mpg, that is 4% improvement per year.

Chris T said at March 3, 2011 12:50 PM:

Volatility seems like a good way to produce a gentle transition as opposed to a collapse.

Actually, price volatility is very dangerous. Companies have a difficult time planning for the long term if they're not sure what the price of a commodity will be even a month from now and tend to get rather conservative. Steady rises or falls are far less painful.

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