Why oil will hit $100 a barrel

[Strelnikov_]

Older article that has a couple of interesting statements. More building of the case that the western economies are going to have to 'make other arrangements' if calamity is to be, if not avoided, mitigated.

http://news.bbc.co.uk/2/hi/business/4713186.stm

. . .

And while some new finds are being made, like Cairn's in Rajasthan, few people in the oil industry believe that new discoveries will match the vast oil fields found in the 20th century. And demand for oil is likely to go on rising.

To see why, travel a few miles from Cairn Energy's Mangala well-head and visit the local school. It's the only stone building in the vicinity. The children walk here from simple huts surrounded by thorn hedges in the desert. There is no electricity at the school or anywhere else. Local transport is provided by camels pulling carts. And water is drawn from wells by hand.

Conduct a simple "energy audit" and you discover that the children use almost no energy. They were hazy about what a fridge was used for and few of them had ever travelled in a car. But, with India's economy growing fast, these children and hundreds of millions like them are likely to become much heavier energy users as adults. "If we are to rid ourselves of the scourge of poverty, demand for energy will at least double in the next 20 years," says India's former Energy Minister Mani Shankar Aiyar.

. . .

A similar view - from a rather different perspective - is expressed by India's former Energy Minister Mani Shankar Aiyar. " As Mahatma Ghandi said - nature has given enough to meet man's need but not enough to meet man's greed. So unless the West curbs its greed we will stay in an era of high prices," says Mr Aiyar.

[Javaman]

1. not a matter of why, it's a matter of when. nt

[cliss]

2. I'm just wondering -

how will $100.00 per barrel translate into retail figures?

I believe current oil prices for Light Sweet crude are around $67.00/bbl. If gas is currently around $3.00/gallon, that means that the multiplier is 0.044.

0.044 X $100.00

= $4.40 per gallon. That will cause some major adjustments in this country, as in any country which is a major petroleum consumer.

[Dogmudgeon]

3. Unfortunately, there is no one-to-one correlation

And that makes it all the more difficult to gauge the effect of price changes. The entire energy marketplace has become highly volatile.

As difficult as it is to believe, the prices we are paying for gas are the result of severe self-restraint on the entire petroleum marketing system. Gas was $1 per gallon when oil was $15 per barrel, a 1:15 ratio; today, $3/gal gas and $67/bbl oil yield a 1:22 ratio. The squeeze has hit the independent gas-station entrepreneurs hardest, of course.

I suspect that a $100/bbl of Brent Crude will translate to a $4 gallon of gas -- only slightly less than your figure, but the second-order squeeze on the price will become critical when crude is nearing $200/bbl. Gasoline should be around $7/gallon then. At some point near that figure, the small gas station owners will be forced out of the market, gas delivery will itself become less economical, which will initiate a new price dynamic, inflating the price. I believe that this is Matthew Simmons' consideration for $190/barrel oil. It is the price at which the entire economic system will no longer be able to compensate through simple market activity, but will become "discontinuous".

I don't plan to start worrying about "spontaneous social change" until gas gets around $7 a gallon. At that price, keep an eye on the petroleum news. When the plans for petroleum product delivery start to change, that will be the signal. Even in a strong economy, it will cause a dramatic uptick in inflation and unemployment. My guess is that it will happen in 2010 -- earlier if the economy stalls into a recession.

Keep in mind, though, that this is just my guesstimate. I have been wrong before and I hope I am wrong about what I think is coming. I do not welcome the Apocalypse. I would prefer to indulge my utopianism instead.

--p!

[cliss]

4. Cool, thanks for the

highly educated "guesstimate".

I've almost got enough credits to walk away with a M.A. in Economics, and I'm still not sure of this stuff. (it's not worth much anyway because there's so much they don't know).

I think you're right: there are so many variables in this long string of equations, that it's hard to tell what will happen.

We do have some assumptions, though.
For example, when gas reaches $4.00/gal., we know that certain things will happen:
1) we will see a lot of hitch hikers, carrying gas cans cuz their car ran out of gas
2) We will see a lot of SUV's driven over cliffs
3) A LOT of trucking companies will go out of business
4) Agriculture prices will ZOOM up to the stratosphere because it's almost 100% petroleum-dependent. A LOT of people will be going on a Crash Diet.
5) Horses & Buggies will see a new popularity.