Krugman: The Oil Nonbubble

[depakid]

“The Oil Bubble: Set to Burst?” That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse.

Ten months later, oil was selling for $70 a barrel. “It’s a huge bubble,” declared Steve Forbes, the publisher, who warned that the coming crash in oil prices would make the popping of the technology bubble “look like a picnic.”

All through oil’s five-year price surge, which has taken it from $25 a barrel to last week’s close above $125, there have been many voices declaring that it’s all a bubble, unsupported by the fundamentals of supply and demand.

So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble?

More: http://www.nytimes.com/2008/05/12/opinion/12krugman.html?_r=1&hp&oref=slogin

[whistle]

1. I still say "Follow the money" and the corruption it feeds

[tama]

4. Follow the money to the end

And you see that money - purely symbolic and abstract fetish of power - is corruption in itself, from life itself and the intrinsic value of life.

But I guess you didn't mean that but the denial of PO.

[bhikkhu]

5. Its odd Krugman doesn't give us numbers to support his argument

As they aren't too hard to find.

The cost of producing oil, the same as any other product, is the reasonable basis of cost. In the "old days" a typical barrel of conventional crude might cost $1 to produce. Ample profit could be taken while still leaving plenty to fund new discovery and infrastructure.

When they say things such as "the easy oil is gone", "at $40, steam injection enhanced heavy crude recovery becomes feasible", or "at $60 a barrel deep-water production begins to look lucrative", the story is essentially that the basis of cost for new production has steadily risen (without, as Krugman points out, leading to over-supply) and with it the "floor" of current oil prices, to maintain current oil flows, has dramatically increased.

The simple story behind rising oil prices is that it costs much more to maintain an 85 mbpd flow than it did to maintain 75 mbpd. The cost is rising all the time as fields mature and decline, and new technology must be developed to secure ever more difficult to extract oil discoveries.

The big new Brazilian discoveries, for instance, are in deep water under a heavy salt layer that requires the invention of new drilling methods and materials to take advantage of.

[hunter]

8. The terrifying aspect of this relationship is that it's non-linear.

Pushing harder for this new oil makes the economy less stable.

It's like standing up in a small boat.

[madrchsod]

2. speculators , the us dollar

and of course the great mortgage swindle raised the price of oil...

demand can be changed overnight but that`s not going to happen.

some idiot in a big suv blew past me at 80-90 miles per hour and two miles later i passed him at a gas station where he was getting gasoline....idiots will never figure it out

[kristopher]

3. Actually because of the cost of vehicles demand takes years to change

Pretend you are an average driver of 15000/year and have a paid off 12 MPG SUV worth almost nothing on tradein, and you want to buy something that gets 26MPG

Does it make economic sense to trade?

[bhikkhu]

6. Jevon's Paradox - increasing efficiency does not reduce demand

http://en.wikipedia.org/wiki/Jevons_paradox

Its a very interesting point that has been written of in many places, and demonstrated quite often in practice.

[kristopher]

7. I don't think that is actually a paradox, since

I don't think that is actually a paradox, since in a complex system there is nothing in the concept of increased efficiency that implies reduced consumption.

And actually, that isn't what's at play here. It is a simple "what's cheaper" calculation. The savings on gas for a new better milage car don't equal the cost of the car. But it will factor in as price shock and ownership dissatisfaction, so people will tend to trade a little sooner and when they do trade they will consider mileage a much more important factor at $4 /gal than at $1/gal.

Long term use will decline significantly as more efficient alternatives are developed to meet demand.

[bhikkhu]

10. And yet "efficiency" is the only solution offered for our oil dependency

Back in old England a new coal-fired engine was developed that was twice as efficient as anything before. It was thought, then, that only half as much coal would be needed and both the miserable job of mining it and the sulfurous pollution of burning it would be eased. In fact, the opposite happened, as the more efficient "work" of the engine translated into immediate profits and rapid economic expansion.

The paradox admittedly doesn't quite fit our situation (coal was abundant then while our oil supplies are not, so economic expansion is not so much an option for us), except that efficiency will not decrease consumption, nor oil dependency.

You can say that "long term use will decline significantly as more efficient alternatives are developed"...and I agree, as long as you consider simpler less energy intensive lifestyles to be a change toward efficiency. For instance, rather than firing up a hugely expensive machine, with parts, fuel and materials from all corners of the planet, to go to the store, a person might chose the efficient option of walking. Or even better, instead of either firing up the same machine or walking a long distance to acquire some food, a person might opt to grow it himself in his own backyard. Far more efficient, and already being done all over the country.

[kristopher]

16. Read these sites

http://www.udel.edu/V2G/

http://www.ocean.udel.edu/windpower/

Let me know if you have a question.

[Ready4Change]

14. Are you going to buy a car anyway?

If you are going to buy a new car anyway, you are going to look at your options.

At that point you are no longer comparing your paid-for SUV vs a new economy car. You are comparing a new SUV vs that same economy car.

Or, put in numbers, you are NOT comparing FREE vs $20,000. Instead you are comparing $35,000+$2,000 a year gas vs $20,000+$1,000 a year gas.

A large percentage of our fleet of cars gets rolled over every 5 years. By 2013 we 'could' have a very different collection of vehicles on the road.

[bhikkhu]

15. We need to compare a new car vs a change in lifestyle

15% of our current imports (Mexico) is projected to be gone by 2012.

The efficiency of our vehicles is less important than the oil dependency inherent in our lifestyles.

[Ready4Change]

17. That I agree with.

I love cars. They became a symbol of personal freedom to me in my youth, and they remain a source of entertainment as well as a source of transportation in my lifestyle.

But that lifestyle (the lifestyle of the developed world to a large extent, and the US in particular) is not sustainable, given our current capabilities. Unlike many, I think, had we expended serious effort on the problem starting back in the '70s, we could perhaps continue without drastic disruption.

But we didn't. We have our pants at our ankles for the coming era, and it's going to be ugly, and then uglier still, for a long time before it gets better.

[Finishline42]

9. Are speculators mainly, or even largely, responsible for high oil prices?

How much does the rattling of sabers push future contracts up? With Iran taunting Lil Bush and Lil Bush responds with threats of "WWIII", what happens to the price of a future contract? But then there's Putin, now in a better position to cover Iran's back than he was when Lil Bush pulled this same stuff with Saddam, and who's really benefiting from the spike in oil prices? Russia and Iran. They're playing chess while Lil Bush is playing checkers - and badly at that.

[hunter]

11. I like the chess analogy.

The idiots who run the U.S. are poker players who came to play the game with extra chess pieces stuffed in their socks.

[happyslug]

12. The US are Football players, convinced they can win because they are bigger

An old joke about the Vietnam War went this way. The US set p its line, the center passed the ball to the Quarterback, who passes for a 100 yard touchdown.... The Viet Cong, picked themselves up, set up the tables and started to deal from the bottom of the deck. The Viet Cong came to play all night poker, the US Football and given the nature of the two games the Viet Cong let the US win its great Victories in South Vietnam, taking huge areas from Viet Cong Control. Then the Viet Cong slowly took back the areas one day and one village at a time. Within several months the area was again under Viet Cong Control. The Viet Cong knew the war would be a long term political fight, like an all night poker Game, which will be over when it is over not before. The US went into Vietnam with a plan to win the war with one great campaign, the football play that wins the game, but a game that only last technically one hour (yes I know that is the Time Clock only, football games can last 3 hours).

The same with Iraq, the US is NOT ready to fight the insurgents at all levels, including setting up schools, fixing the infrastructure, sewerage, water, electricity etc. That is where we are losing the war in Iraq and Bush is incapable of understanding it. Bush is a free market Right wing Republican, those are to be provided by private Enterprise NOT the Government. Private Enterprise sets up the stadium, the runs the Concession stands. The Government only runs the terms, and then only for the duration of the game. The idea that part of the MILITARY PLAN TO DEFEAT THE INSURGENTS MEANS TO BUILD UP THE INFRASTRUCTURE IS FOREIGN TO HIS MINDSET. I would blame the CIA, but the CIA knows better, the CIA has blown up infrastructure in countries it wanted the government overthrown. No this is far Right Wing Incompetency, that separates anything dealing with the economy from Political or Military objectives.

Once you understand that we can only defeat the insurgents by building up the infrastructure of Iraq and to make sure the Iraqi knows we are doing it, i.e. Military protection for the projects and immediate repair if it is damages no matter what the costs. Once we start to do that we can defeat the Insurgents, but it will lead to much higher US losses as more US troops will be needed to protect the projects AND TO BUILD THE PROJECTS. This will require massive US spending of US money in Iraq, money the US does NOT have. Once you realized what is the cost to win in Iraq and understand we can NOT afford it, in terms of lives or money, then you understand why we must withdraw.

We are like that US Football Term, won every football play we ran, but lost all of our money to the card sharks at the tables AFTER the Football game had ended do to time, but before the opposition had decided to call it a night of all night poker. My father always said, play a game you can win, not one your will lose. We are losing Iraq and can not win, we need to pull out.

[hunter]

13. Here's a parody of a CIA site...

Oh wait, it is a CIA site.

https://www.cia.gov/library/reports/general-reports-1/iraq_wmd_2004/index.html

Chess pieces in socks, all of it...

The former Regime had no formal written strategy or plan for the revival of WMD after sanctions. Neither
was there an identifiable group of WMD policy makers or planners separate from Saddam. Instead, his lieu-
tenants understood WMD revival was his goal from their long association with Saddam and his infrequent,
but firm, verbal comments and directions to them.