Peak Oil

Oil Passes $135 per Barrel

By Ryan McGreal
Published May 22, 2008

It has almost become tedious to keep reporting new records in oil prices, as the price of a barrel of oil passed $135 today and motorists continue to gnash their teeth and tear their shirts over a global supply constraint that geologists started predicting in the late 1990s.

Nearly everyone else ignored the geological evidence for a near-term peak in oil production until very recently, and today it's still difficult to find a newspaper article about oil prices or gas prices that actually acknowledges the underlying supply situation.

Instead, populist pundits are calling for gas tax "relief", which won't lower prices but will leave us even less prepared to transition away from dependence on oil.

Prime Minister Stephen Harper sensibly rejected such calls, but he got his response only half-right. He also advocated cutting general taxes to "lower costs for consumers generally".

He cited the two point reduction in the GST as an example. However, that money would have been better spent investing in more sustainable public infrastructure, including higher order electric rail transit and mixed-use, walkable neighbourhoods.

Airlines "Not Build to Withstand" Expensive Oil

In related news, American Airlines has announced that they plan to begin charging $15 USD to check in the first bag of luggage. The airline industry has already adopted a $25 charge to check in a second bag.

This is in addition to American's decision to cut main domestic seat capacity by 11 to 12 percent and regional affiliates' seat cpacity by 10 to 11 percent, with analysts predicting layoffs in the thousands as a result. American expects to retire "at least" 75 planes by the end of the year.

Gerard Arpey, CEO of AMR Corp, the parent company for American, explained the policy this way: "The airline as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak US economy."

The bad news just keeps rolling in for the airline industry. While a few airlines, like British Airways, continue to perform well, many are struggling. Thai Airways' first-quarter profits are down 48 percent, TAM's profits are down 96 percent, Alitalia lost $333.1 million, and Air Canada lost $288 million while ACE Aviation Holdings struggles to dispose its 75 percent stake in Air Canada.

The industry trend is moving away from smaller planes with higher per-passenger operating costs and from flights to smaller regional destinations. Instead, the industry is moving toward a business model with fewer flights on very large vehicles (like the Airbus A-380 moving between large metro centres with high passenger traffic.

Over the longer term, long-distance intra-continental transport will likely shift away from aviation and toward modern rail.

The question is: will Hamilton notice this shift and adjust its long-term economic development plans accordingly?

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By gullchasedship (registered) - website | Posted May 22, 2008 at 15:44:12

One of the biggest reasons that the price of oil keeps increasing is because of the poor performance of the American dollar. Many are predicting that when the American economy improves (which it will), the American dollar will begin to perform better, and the price of oil will drop below $100/barrel.

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By Ryan (registered) - website | Posted May 22, 2008 at 15:47:45

Look at oil prices in other currencies for comparison:

http://europe.theoildrum.com/node/3106

The price increase is real.

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By Frank (registered) | Posted May 23, 2008 at 08:29:55

No doubt the price increase is real. But...don't most currencies trade in American dollars?

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By adam (anonymous) | Posted May 23, 2008 at 10:40:11

Look no further than the Canadian dollar, Frank. We trade on the international market, not the US market.

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By David (anonymous) | Posted May 23, 2008 at 11:24:50

Ryan is right - the price IS real. Those posted charts agree with Matt Simmons, who said the price is much more a supply problem than Dollar drop. A story this week said BP and Exxon are complaining they can't get enough oil to refine. And a OPEC exec said they have lost control of prices because they are already at maximum production. Mexico, the US #2 oil exporter, will themselves become an importer within 2 years and run out totally in 10.

US has 4% of world population, but uses 25% of world oil. That means if 16% of the world used oil like the US, the other 84% of the world would have none. Well, guess what. Suddenly the whole planet is adopting much of the Western lifestyle, from cars to Big Macs. That's why the US is in the Middle East with guns, to take control before someone else did - a desparate move for a desparate situation.

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By Ryan (registered) - website | Posted May 23, 2008 at 16:01:31

Interesting Reuters article in the newswire today: "Think oil prices hurt now? Just wait"

http://www.reuters.com/article/GCA-Oil/i...

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By trey (registered) | Posted May 24, 2008 at 12:34:48

Gas should be around $2.00/L now. This time last year gas was around $.95/L and the price of a barrel was $65. It's double now but gas has only risen 30%. Where's the conspiracy theorists now?

I personally look foward to $2.50/L in 12-18 months. Then maybe a real energy solution will happen and force changes to how we live and function within this planet. Trying to figure out how how to keep gas cheap is not a solution.

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By peter (anonymous) | Posted May 26, 2008 at 05:50:55

i generally agree with the notion of 'looking forward to $2.50/l' gas. that said, i don't think there's a solution to our woes and that expensive fuel will ruin us, slowly but surely. in the future, life will be difficult and not the green utopia that many envision. hey, i love camping but i don't wanna do it 365 days a year - that's our future.

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By beancounter (registered) | Posted May 26, 2008 at 22:39:45

So why do people keep buying bigger and bigger houses?

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By beancounter (registered) | Posted May 26, 2008 at 22:51:21

Hey Trey.

Your math is excellent, but the cost of gasoline is made up of costs other than that of the raw material.

There's labour used in moving the oil to the refinery and from there to the gas station. In addition there would be administration costs, the cost of the actual refining process, depreciation on equipment used, etc. Oh yes, there are fuel taxes, GST and excise tax. These costs are unlikely to be rising as fast as the cost of crude oil.

We may have to wait a little longer for gasoline to rise to $2.50 per litre.

In any case, how do we predict the price level at which wholesale changes in human behaviour will take place?

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By Undustrial (registered) - website | Posted May 26, 2008 at 23:13:06

Demand for oil has been exploding in the past few years, while oil production has plateaued at best. The world is coming to realize that treating a fossil fuel as a renewable resource does not make it one.

If you were Iran, Venezuela or Saudi Arabia, would you really want to scramble to bring all possible production online, so as to drive down the prices for the oil-sucking western world? Or would you cautiously cut back on production to ensure that it lasts as long as possible at a relatively high price to ensure the maximum number of remaining years of prosperity? Our politicians in Alberta could learn much from questions like these...why are we fighting to keep royalties down and subsidies up?

Ladies and gentlemen, while our parliamentarians debate the virtues of a carbon tax or "emissions trading system", the realities of oil production are imposing both. At current rates of growth, and there's no reason to believe those will slow significantly until major changes are made to the way we heat, move and feed our society, especially when billions of people in Asia are striving to catch up. The price of oil has been far too low for generations, and it's led to a world where energy is used far too frivolously for good sense, and that has meant that alternatives have never had a true opportunity to develop.

We can deal with oil depletion in one of two ways - we can lower taxes on fuel and subsidize production, we can increase automobile efficiency through smaller cars and hybrid whatnots (studies have shown that greater fuel efficiency simply lowers the price of driving, thus causing people to drive more), and we can work vigorously to bottle every last drop of oil we can get our hands on regardless of financial, environmental or human restraints - all to prolong the status quo. Or we can read the writing on the wall and go about getting a head start on the kind of changes which are coming, one way or the other. Effective transit systems, bicycles, organic farms and denser urban development.

Frankly, I have very little faith that our leaders will go with the latter, at least, until things get a lot worse. It's up to individuals like us to cry foul, to make changes in our own lives and do whatever we can to help others along that path as well.

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By Ryan (registered) - website | Posted May 26, 2008 at 23:48:18

"how do we predict the price level at which wholesale changes in human behaviour will take place?" Richard Gilbert reckoned in his report Hamilton: The Electric City that gas will have to reach $4/L before it triggers a wholesale shift in land use and transportation patterns.

He concluded that there's a better than 50% chance that this will happen by 2018.

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By beancounter (registered) | Posted May 27, 2008 at 11:51:57

So why do people keep buying bigger and bigger houses?

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By Ryan (registered) - website | Posted May 27, 2008 at 12:18:01

Denial: it ain't just a river in Egypt.

It takes a while for price signals to feed back into major purchases of houses and consumer durables; and the market is already distorted by zoning and banking rules that favour the construction of single family houses and townhouses on greenfields.

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By Ted Mitchell (registered) | Posted May 27, 2008 at 15:56:14

I'm not sure if the best course of action is either:

1) a real gas tax, like europe, say adding $1/L to the present tax and taking away equal amounts from income tax. This would help stabilize demand, and along with adding buffer reserves, avoid peak demand /disaster induced major shortages

or

2) do nothing for carbon tax, and allow wild price swings and seasonal, random shortages. This might actually be more rapidly progressive for alternative transport, because of the political pressure it would induce.

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By beancounter (registered) | Posted May 27, 2008 at 22:35:26

Wow, Ted, you have great faith in our governments.

I am trying to visualize how this would work in terms of being revenue neutral. Wasn't that what was supposed to happen with the GST?

I am thinking though that it would be a kind of moving target. As the gas tax bite takes hold, people start adjusting their driving habits, use less gasoline and the revenue drops. Would that then necessitate a retrenchment in the income tax cuts?

The other thing is that the suggested tax regime under alternative one may not be entirely equitable, as there are people who really need to drive for work reasons, such as people in the building or repair and service trades.

Perhaps your second alternative would be better, as you said. Market forces would allow people to make adjustments that they feel are best for them, as opposed to having the tax authorities make decisions for them.

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By Ted Mitchell (registered) | Posted June 03, 2008 at 09:36:50

Let's see, it is pretty simple. Increasing demand. Nonrenewable resource. Decreasing supply. And still applying old fashioned economic theory like market forces. Hmmm.

Count them beans, but whatever answer you get will be wrong until you change the mathematical model to deal with things like "product unavailable", which is going to happen several times in the next decade if people are allowed the freedom to decide for themselves, without really grasping or being held responsible for any consequences of that false freedom.

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By David (anonymous) | Posted June 04, 2008 at 23:19:29

One thing for sure.... Ryan's "denial" will cause major economies to drive off a cliff before ever realizing a problem is coming, and the news media won't report it until there is no power left for their transmitters. There is some elastic in the economies, but once the rubber snaps, the dominoes will fall.

This is not just a matter of "getting to work" - since your work will be obsolete once customers focus on survival instead of consumption.

A staggering definition of Modern Agriculture - "the use of land to convert petroleum into food" - should also rock some worlds. Invest in vegetable seeds.

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