Tuesday, February 10, 2009

The Price of Oil this summer

Devin, over at Bleakonomy had posted a comment this morning on the future of gas prices which got me to thinking a little about where they might go this year. Trying to get some sense for where we stand on this needs some information, which I can get from, for example, the Department of Transportation as well as the EIA. Let me see if I can go through the logic of my answer with a series of questions and replies.

Firstly we recognize that in order to stabilize prices OPEC has cut production, so that there is not as much oil available. For the sake of this example I am going to make some very crude approximations. Let us say that the world is producing 80 mbd, half of which comes from OPEC, and half not (it’s actually about 43% OPEC). The non-OPEC portion has stayed at the same level (they are slightly past peak production), while the reduction in supply to balance demand has come from OPEC. OPEC has cut production 4 mbd to soak up the un-needed demand over the past few months as the economies of the world have sunk. We are now back in balance between supply and demand at a price of $40 a barrel. America uses about a quarter of the world’s oil, which for our discussion we can therefore assume is normally some 20 mbd of oil. We will further assume that 45% of a barrel of oil is made into gasoline and that the rest of the barrel can be consumed as a variety of products that don’t influence the argument. America thus uses about 9 mbd of gasoline.

To keep the argument simple I am now going to assume that all this is used in cars. If the world is now in balance with these numbers, what can we expect in the next year. The first thing to understand is that demand is not constant during the year. Thus when we plot demand it fluctuates, with most driving being done in the summer. You can see this in two sets of graphs. The first (and I referred to this last week) is the refinery production to meet demand.
US Gasoline Demand
We can compare this with the amount of driving that the general public are doing. This is broken down into rural and urban driving, and shown, by month (the tables are from last November).
Rural driving
Urban driving

The figures show that actual driving has dropped between 4 & 5% from the 2006/2007 average to 2008. But it also shows that right now we are at the time of year when demand is least. We can go back and look at the composite figures from the FHWA over the past four decades and the shape of the curve is the same.
Vehicle miles travelled by month averaged 1970 – 2007. (FHWA)
Vehicle miles travelled per year 1970 – 2007 (FHWA).

What the curves show is that we can expect an increase in demand for the next six months of somewhere around 13%, or a little over 1 mbd. (Looking at the normal gas demand change in 2007 it went from 8.8 to 9.6 mbd – see top graph). Now converting that back to crude would increase it to 2.2 mbd. However, there is a slight change in the blending strategy to change the mix, so let us simplify that to drop the need for crude down to 2 mbd.

If the US demand maintains its quarter of the world demand proportion, that would take the global increase as we move into summer up some 8 mbd. Some countries won’t see that since they have other constraints, and other countries are going into winter not summer, so let us cut that number in half. And we get to 4 mbd, as the increase in demand between now and summer.

How much did OPEC cut production down to meet a decline in demand, about 4 mbd. So what we may well see over the next six months could well be a slackening of the OPEC restrictions on production, to meet the increasing seasonal needs, but as that slackening occurs, so it will be at a price that OPEC controls.

So if I were to make a prediction for oil prices this summer I would suspect that they would be around $65 a barrel. Of course the economies of the world are still somewhat in the tank, but if they do not get much worse (and thus drop demand further), then (having left a loophole a battleship could sail through) this would be my prediction.





3 comments:

  1. I agree with your analysis, but the global economic collapse makes it hard to predict oil prices in the near future.

    "Peak Oil and Global Economy" (excerpts)

    Recent news headlines reveal that the U.S. economy is deteriorating rapidly: “Be Prepared for More Cutbacks,” “Mass Layoffs Continue at Rapid Pace,” and “Economy’s Plunge is Worst in Quarter-Century.”

    The Work Bank forecasts that the recession of 2008 will extend into 2009 and probably to 2010:

    “A pronounced recession is believed to have begun in mid-2008 in Europe, Japan, and most recently, the United States. This recession is projected to extend into 2009. The possibility of a serious global recession cannot be ruled out. Even if the waves of panic that have inundated credit and equity markets across the world are soon brought under control, the crisis is likely to cause a sharp slowdown in activity stemming from the deleveraging in financial markets that has already occurred and that is expected to continue.”

    The World Bank sees some signs of optimism for 2010, but concludes that “global recession is likely to be protracted” and “an even sharper recession is likely.”

    A variety of analysts of The Wharton School, forecast a deep recession extending through 2010 and possibly beyond.

    Gerald Celente, Editor and Publisher of "The Trends Journal," forecasts a global economic collapse beginning in 2009 (interview summary, not quoted directly):

    The global economy will collapse in 2009, resulting in the worst recession in the post WW II period. The commercial real estate sector is highly leveraged and will collapse beginning in late February or early March as major retailers fail, leaving vacant rental space that will not be filled. This will lead to further failures in the finance and banking sectors and higher unemployment which is at 13% and growing.

    Some two-thirds of the U.S. economy is based on consumerism, which is declining rapidly due to increasing unemployment. Declining personal income means a shrinking tax base and a need to raise state, local, and federal taxes and user fees.

    This economic collapse, Celente believes, will lead to the "Greatest Depression," more corporate fraud, increased street crime, taxpayer revolts, rioting, and revolution. Survival is now a real concept as people lose investments and jobs. A return to frugality and self-sufficiency will characterize the economy in years to come.

    (Full article/continued here with links): http://survivingpeakoil.blogspot.com/2009/02/peak-oil-and-global-economy.html

    This looks like a lot less driving to me.

    In addition, the most wealthy man in the world, Carlo Slim of Mexico, stated yesterday that Mexico faces an economic catastrophe and will soon have the highest unemployment in 80 years. Most oil in Mexico is used for transportation and building construction -- both of which will tank soon, freeing up much oil for export to the U.S.

    On the supply reduction, there are possibilities of resource nationalism that could restrict the flow of oil to the wealthy nations and classes.

    In sum, economic and political factors make oil price predictions a risky business.

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  2. Clifford:
    My original teaser for the entry over at The Energy Bulletin was "How to make a wild guess sound scientific." At the moment there seems to be no deceleration in the job loss plot, and this is going to be a major factor in any prediction. But one of the reasons I put the last graph in was to show that there was not that much drop in actual miles driven in any of the earlier recessions. Now this is worse than most so it is hard to make a viable estimate, but there is a logic to this one and we will just have to see where it goes.

    Thanks!

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