Jim’s Blog

It seems that Arnold Kling has been in Afghan cave during the past six months. He does not seem to think that there has been any bad news on oil supply over the last six months.

The recent run-up in oil prices represents a similar puzzle. I think that it’s difficult to tell a story for the rise in crude prices for the last six months that is based on the rational digestion of news. Either six months ago folks were overly optimistic about long-term supply and demand conditions or now they are overly pessimistic about those conditions. I don’t think that what changed in the last six months was the news about supply and demand.

I have been watching the news, and over the past few months it has been quite horrifying, particular with the Democrats and both major party presidential candidates shooting down Shell’s plan to develop shale oil, which pretty much guarantees extraordinarily high oil prices for at least the next two decades. Indeed, the political majority in most of the developed world seem to intend to block all carbon extraction.

To satisfy world demand, as former third worlders become first worlders, and want cars and air conditioning, the world needs to increase production of oil and oil substitutes about three million barrels per day each year. Equivalently, the world needs to increase production one hundred and fifty million tonnes per year per year. (more…)

Since I think I am smart, going to make prediction. (more…)

The American health care system is socialism without a central plan, and capitalism without markets or prices. (more…)

Econbrowser publishes oil price estimates in more detail

Bottom line:  Demand is going to rise one hell of a lot.  Supply for that demand just is not there.

This paper does not review supply from coal to liquids or gas to liquids.  The only way to meet demand is to generate liquids from coal by underground gasification followed by gas to liquids conversion.  This will require many, many quite gigantic projects, but at present we have only a small number of small exploratory projects, most them scheduled to start producing around 2015 or so.  So the price of oil will have to rise to quite astonishing levels, at least for a couple of decades.   We have only seen the beginning.

I am continually puzzled by the world’s chronic inability to do basic arithmetic, but I see that econbrowser has done the maths on oil.

There are a lot of people in China.  There are no longer large political obstacles to competent and industrious people in China making money.  Therefore, very soon, a lot of Chinese will be making a lot of money.  Therefore China will soon be consuming an enormous amount of oil.  Econbrowser concludes China will soon be consuming a lot more oil than is ever likely to come out of the ground.

Therefore the price of oil will rise without limit until coal to oil and nuclear to hydrogen fills the gap.  And right now, coal to oil projects are insignificant, and nuclear to hydrogen is not even on the drawing board.  Therefore in the next decade or so, oil will rise to astonishing heights, far above present prices.

You know saying about markets: “They don’t ring a bell at the top or the bottom”

The bell has just rang to announce the bottom of the housing market in California. From here on out, the prices are going up from insanely high to even more insanely high. Never again will ordinary affluent middle class people be able to buy a house in silicon valley, until the day dawns when the private property right to develop land is once again respected.

Various incompetently run or criminally run banks found themselves with lots and lots and lots of inflated and fraudulent mortgages. In due course, they found themselves with the real estate that was securing the mortgage. In the last few days they have held auctions in Silicon Valley and Sacramento to get rid of the properties. The properties sold like hotcakes, with bidders bidding them up, and up, and up.

At present, Environmental Protection Agency rules require that that Americans convert food that could feed five hundred million people into fuel. But this is not enough. The rules require that it be increased five fold over the next fifteen years.

A bunch of senators have asked that the rule be set aside. Hey guys. You are senators. You passed the law. Repeal it.

Peak oil has been predicted so many times that, like the boy who cried wolf, no one believed the prophets of doom any more. I certainly did not. But even a stopped clock is right twice a day, and oil production peaked in 2006

According to the US Energy Information Administration World oil production in barrels per day was:

So in one sense oil has not yet peaked – last month was the highest ever, but not by much.

Of course, in the long run, oil cannot peak. Coal to liquids and gas to liquids must fill the gap. But at present, that is small, and not rising very fast.

Bryan Caplan wonders if oil prices are a bubble.

When oil spikes abruptly, that means people made incorrect investment decisions - under invested in exploration, development, and gas to liquids conversion.

A simple back of the envelope calculation tells me they are still under investing. Exxon recently abandoned gas to liquids plant that would be profitable if oil remains above forty dollars to fifty dollars a barrel. But if everyone acts like that – and everyone is acting like that – oil is going to be way above fifty a barrel.

Do I hear someone saying “Hey. Do you think you are lot smarter than the guys running Exxon?”

It is quite simple.  For the price of oil to remain stable at present levels, we need to accommodate China’s industrialization by producing a lot more oil each year.  The planned increases in oil production add up to peanuts.  So the price of oil is heading up, and going to stay up.