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Politics : Rat's Nest - Chronicles of Collapse -- Ignore unavailable to you. Want to Upgrade?

To: Mannie who wrote (2040)	8/31/2005 3:12:42 AM
From: Wharf Rat	Read Replies (2) \| Respond to of 24213

When did the era of cheap oil end? Advocates of Peak Oil rightly point out that Hubbert's global peak is not the end of oil, but the end of cheap oil. When supplies begin to tighten geologically, prices must rise if demand does not reduce in a proportionate manner. When they rise above a certain point, it is no longer deemed cheap oil. The problem that struck me was what exactly is "cheap oil" and when will or did it end? West Texas Intermediate Crude was about $67 a barrel last time I looked. Compared to 1998 when it hit $10, $67 looks expensive and $10 looks incredibly cheap. When (not if) that barrel goes over $100, does $67 become cheap or does it stay expensive? It all seems to be a matter of relative values. Then again, if you ask someone drawing social security about $67 oil, I'll bet he would say it is too expensive. What would Bill Gates say? Would he say it can never be expensive as far as he was concerned? So, unless we can come up with a definition of "cheap oil", it is a pretty meaningless term. Should we define it in absolute or relative terms? If we assign an absolute dollar value, we have to understand that the dollar is a tradeable asset that also fluctuates in value. After all, the dollar spent 2001-2004 dropping about 30% in value against other major currencies. In the same time period, crude oil went up 100%, yet since the end of 2004, the dollar is up 13%, but oil is also up 59%. Pardon me if I sound confused, but some might suggest that since oil is priced in US dollars, it should move in a contrary fashion to it. Well, it just doesn't because life is not that simple. Perhaps oil should be priced against a basket of currencies? That is what the US Dollar Index partially does, if we divide the dollar price of oil by that index we get this graph: The effects of dollar volatility are now reduced. But then again, are we any further in deciding what cheap oil should be priced at? Okay, perhaps we should define the price in terms of the economy of the nation? If the cost of oil is getting higher and higher, this should become an increasingly higher percentage of GDP. Fair enough, but how do we express the oil component of the ratio? Oil consumption expressed in dollars would seem appropriate since GDP is also expressed in dollars, at least we don't have to worry about dollar volatility since it cancels out on both numbers! Thanks to the ever helpful Google I found this chart: It only goes up to the year 2000, but it gives us a measure of how rising oil prices eat into GDP share. But that seems to have only changed the question from "What is cheap oil?" to "What is a low energy percentage of GDP?". Just like $10 oil is cheap, so we note that 6% is a low energy percentage of GDP, but how high does it have to get before it is no longer "low"? I think I am getting too pendantic in my old age. May I suggest some kind of term that cuts through the relativistic fog? Cheap oil is that price of oil which is below the average, inflation adjusted dollar price since the age of oil began. We start from the beginning because that represents the upside of the global Hubbert curve. Using the graph at this link, we find that the inflation-adjusted mean value comes out as $19.41 on a global pricing basis. So, by definition, any price below $19.41 is "cheap oil" and if Peak Oil is here or imminent, then whenever crude oil last closed below that price would be the end of the era of cheap oil. A look at the West Texas Intermediate price chart shows that the era of cheap oil ended on Wednesday, 30th January 2002. The day before that, President George Bush gave his State of the Union address. He began thus: "As we gather tonight, our nation is at war, our economy is in recession, and the civilized world faces unprecedented dangers. Yet the state of our Union has never been stronger." The era of cheap oil prophetically ended the next day. Some years from now, the meaning of the phrase "unprecedented dangers" will be rewritten and recession will be a most desirable state to be in. The citizens of the Union currently rally against the forces of international terrorism where names and faces can be held in contempt, but the unprecedented danger of ever decreasing barrels of oil has no face and only one name - "Peak Oil" and it is destined to strike not only every skyscraper but every home and individual who flicks a switch or turns a car ignition key. newerainvestor.blogspot.com