Why oil prices will tank

TULLY WAS RIGHT!!!!!!!!!!!!!

Like everything else that reaches it summit there is only one way to go and oil will meet the same fate. That is of course if the brain surgeons that run this country start drilling and exploration everywhere where they believe they might find some oil. People first, not animals as the tree huggers now have it. At least I hope that is what happens and that those who have held us hostage for so long with their monoply power end up holding onto a whole lot of tulips -WORTHLESS!!

The US is by far the biggest consumer of oil in the world. The price of gas here is less than half of Europe and much less than China and India. This has encoraged huge waste eg size of vehicles, poor mpg figures, wasteful airconditioning, patio heating, etc. When the US feels the pinch and starts using energy more sensibly, oil prices will drop back, hopefully not to a level that will again encourage wasteful usage and kill off alternate energies.

unconventional oil reserves in Venezuala are upwards of 1.2trillion proven—and as much as 3 trillion and dwarfs the middle easts crude.

Unconventional heavy oil costs only about 10-20$ more to refine per barrel.

Most oil experts say the true cost of oil should be anywhere from 50-80$–and even if no more oil is discovered in the next 20 years……and the unconventional supply is tapped at $20more per barrel………the true price max should be around $100 per barrel with an almost infinite supply.

This is a mere manipulation that i personally feel is great for the world and U.S. as a whole…….simply making us more energy efficient and green in the process. Hopefully $4-$5 gas stays around for another few years to allow technological investment to continue.

Opec will see the writing on the wall once annual consumption peaks and then starts to slump and we will see prices back to $30-50barrel.

No doubt in my mind that 20 years from now we will be primarily using alternative energy methods and goverments will be tarriffing oil use right out of existence with the Middle East having nobody who needs their oil.
This is the worst thing that could happen to Opec and the best for society in general.

Look at the investment going into Nuclear and Wind as we speak. The french currently have 80 new contracts for Reactors. (reactors are almost an infinite resource) Or the billions in wind development. These are investments that are going to permanently alter the supply/demand equation far more than Chinas development/consumption.

Here is something to chew on. Look at our changing lifestyles. Many people don’t go out anymore after work; they chat, email, text, play video games, or watch their cable or sattelite channels. City and county governments have decided not to open public pools and not pay for lighting at ball fields. The budgets won’t allow it. So we sit home, with the car in the driveway not using ANY gas. My wife and I do all of our errands on the way home to eliminate an extra trip back to town. Demand and consumption are changing, we just don’t realize it.

Harvey hensley says: “The other change in the “fundamentals” is on the demand side. Yes, in the past, the US demand went down quickly after the oil price spikes in the seventies. This change in the US demand had a major influence on the overall demand so that the overall result was a reduction in the entire demand curve. Now, even though the US is still the major consumer, decreases in the US demand are being negated by similar increases in the developing countries that are subsidizing the price of oil to their people.”

And therein lies the fundamental fallacy of the oil bubble; the myth of decoupling. Every bubble has its fundamental fallcay on which faith in teh bubble is based despite all rationality. With the dotcom bubble, it was the fallacy that the Internet was going to fundamentally and irreevocably change the way we purchased every type of product, including the banal such as groceries so that we reached a “prosperity plateau’. With housing, it was the fallacy that housing prices never go down, they only rise and occasionally plateau at a “prosperity plateau”. With oil, it is the fallacy that demand will never go down no matter the price because demand from the former third world and now industrializiung nations will constantly increase as part of oil’s prosperity plateau.

This fallacy is equally idiotic for several fundamental reasons. First, demand in countries like China and India is based on demand for products and services provided to countries like the US and EU members. If teh economies of those countries are impacted, demand for teh goods and services from China/India will shrink, thus shrinking demand in those nations too. It will involve a lag and be a multi-stage reduction rather than a cliff, but it will happen all the same. The only difference between the ability to reduce demand now and that of teh 80s is that today’s halt on demand will be staggered over a months and in stages rather than one screeching stop. Second, if demand in the US/EU falls it will be because teh price of oil has forced us to develop alternatives more rapidly than we otherwise would. And if we develop alternatives, such as cheaper solar or some other jump ahead, then those alternatives will be exported to the India/China’s of the world and thus reduce demand for oil proportionately also.

Oil is definitely a bubble. It has long passed the stage of equilibrium and the only two questions now are (a) how much larger does the bubble go before bursting, and (b) how violant will the burst be?

Comparing housing to oil, is less than useful, perhaps only wishful subterfuge on the authors part. As noted houses are built and remain, oil is pumped and consumed. Oil is a natural resource, houses are not.

The authors declaration that the housing bust was soley caused by overbuilding and underdemand ignores, bad policies, criminal loans made on bad faith with no equity, which are like acid on the metal of the banking system and a faltering economy, amongst other factors affecting all real estate. Our economic model is being severely tested and some components have already failed – ie Bear Stearns.
Housing and banking are related and are both in trouble. Oil is not related to housing in anywhere the same measure.

Oil is history, oil is finite, consumption is ongoing and will continue until all available oil is consummed. Therefore the price will continue to increase until a viable alternative is designed/invented/discovered. Oil prices will fluctuate as a product of the banking instablities which will continue to whipsaw the investing community. The money supply has been overinflated, the purchasing power of the dollar is dropping, making oil every day more expensive. We find ourselves in the perfect storm for oil and not a damn thing we can do about it today. All the answers lie in the future and nobody in Washington is worried about anything other than getting reelected. We have no energy policy other than to burn up all the oil we can find, how can we expect for things like the price of oil to change when we keep doing the same things over and over?

The price of oil will drop when viable alternatives exist, and that day is not tomorrow. When oil is worthless it will be worth less, until that day we are stuck, we are oil addicts, leveraging our lifestyles against an unstable and diminishing commodity, and like all addicts, denying the reality we have placed ourselves within.

We are in more trouble than we know, if we continue to go forth blindly hoping the price of oil is an illusion soon to dissolve into thin air. Higher oil is the reality that we must come to grips with if we are to move forward and resolve the problems to come.

Oil prices will fluctuate with economic conditions and will drop during the coming depression, but so will wages so the point is moot. Live by oil, die by oil.

What i see from all of these blogs is people think WE can control the price of oil… I’m sorry but that is not the case.. it’s the middle east that controls the price now and even if the US went into a downturn worse than the 30’s with oil at $130 a barrel OPEC wouldn’t bat an eyelid.
they would just cut production by 15m barrels a day and still make 5 times more money than 10 years ago.

What nobody understands, and what will destroy investors some time in the next several years, is that oil is priced in U.S. dollars. Oil doesn’t cause inflation. Inflation is the creation of more currency. More currency chasing relatively fewer goods and services is what causes oil and commodity prices to rise.

Commodity prices have tended to fall in real terms over the long term, and will continue to do so. So I can’t say gas will fall from $4 nominally. But I can say with absolute certainty that it will be cheaper one day in inflation-adjusted terms. People forget what awful businesses these commodity producers are. They’re only great every once in awhile. That time is now, and it’s a certainty that it won’t last forever.

There are so many fallacies at work here, but one of the main ones is the idea of peak oil. Current technology brings up less than half the typical oil reservoir.

The other fallacy is the Malthusian, Club of Rome viewpoint. That’s totally false. With every new human mouth to feed comes a new brain that thinks.

Supply is peaking or has peaked. Geologists around the world know that someday we are not going to be living in the “Oil Era” – which is not to say we’re running out of oil/petroleum, but rather that with Deman spiking and economic growth around the world continuing, the SUPPLY will be depleted faster. Peak oil is the point at which production starts to decline. There have been NO SIGNIFICANT new discoveries in some years, and the only thing that will bring down the price of oil is for the US and developed/developing countries to switch to newer technologies that either drastically reduce demand or wean us off petroleum for transportation altogether.

Bear in mind, petroleum is also used in many daily products – lubricants, medicines, cosmetics, plastics – so just reducing consumption at the pump is only one aspect of reducing our demand and dependence.

The end of the Oil Era means we must invest research and development dollars/Euros into a range of viable alternatives — or else we will be caught with our “pants down” – and we will be stuck paying higher and higher prices for a commodity that is plagued by everlasting high demand, and ever-increasing depletion of supply.

The prices will not drop significantly; they will continue to rise.

This article has flawed logic.
(1) Oil is consumed worldwide. A slight reduction in US demand does not reduce global demand and bring down the price.(ECON 101 has its limits !!) Here in Germany we pay over US $8/gallon and traffic is heavy. (2) To compare oil sand and shale oil production to traditional oil field production is like saying that 10,000 beefs can be replaced with mouse meat. True, it is possible. How long to organize this? (3) The expectation and even the demand that a poor oil producing countries (The populations of oil producing countries are mostly POOR.) should depleat their resources quickly to help the rich and fat does not sell well outside of the US.

Expect higher prices for oil.

Anyone thinking there is a supply shortage needs to wake up. There is no supply shortage. Someone show me some hard proof that the supplies are diminishing. There is none, its all speculation. Anyone who thinks $4 a gallon gas is here to stay needs to think first. Gas was $1.00 a gallon back in 99′ and the economies of India and China were robust back then. This whole debacle is a myth perpetuated by the media and junk science. Stop buying into it and watch it go away.

All I have got to say is don’t hold your breath for oil prices to fall and the best we can hope for is the new technology of lithium batteries to supply our cars in the future. We are America and have to many problems from rising health care to retirement to worry about 10 dollars a gallon in gas to fill your 20 gallon tank.

Absolutely right!
Crude prices will come down. It is 100% certain.
I know I will die. It is 100% certain.
When? That’s the hard part.
Down from what price? Hard too.
It’s only $130/bbl now.
Gasoline is about the cost of bottled water.
Still cheap by almost any value measure except “what it used to be”.
The future? Think ’specialty coffee’.
Everyone in N.Am. drives 20% less? Could work but it’s in the ’snowballs chance’ category. If it did actually happen, it would be because of other very bad things taking place.
The history: 15 mpg was pretty common for vehicles in the 80’s.
The late 80’s “oil glut” was caused by a N.Am. fleet changeover & milage improvement mandated by the EPA in the early 80’s. Yes Dorothy, it takes about seven years for a vehicle fleet changeover.
Stated simply, the crude price trend will turn down when consumption goes down below maximum physical supply rate. This will happen when N.Am. and global vehicle fleets are replaced with minimum 40-45mpg and non-petroleum fueled passenger vehicles. Do the math.
tick toc
Enjoy the spikes and corrections within the strong multi-year uptrend. It’s still early in the price cycle.

I do agree with the statements given here except the fact that India is highly subsidising oil prices. In India we pay a price which us much higher than the price paid by an American. The petrol prices in India is around Rs 60 per litre. Which works out to around USD 5.55 per gallon. The government puts all kind of taxes on the oil production and gives back a part of that. If the government had reduced taxes there would not have be any necessity for a subsidy(If u can call it that way).

All the dreamers expecting the price to drop and return (”because it’s going bust”??) wake up. In 1972 a gallon of gas was 13 cents a gallon. Then came a shortage with long lines and odd and even tag number days to get a limmited ammount of gas. the cost for a gallon rose to 50 cents and the public threatened with boycots and rebellion. It did not happen. Prices continued to climb and no one complaint. Suddenly comes a spike, because investors, brokers and refiners have figured out that yes, we are running out of crude and in order to make as much profit as possible in a sort of “last Hurrah” we are paying the price.
You will never, ever see the price per gallon drop below $4. Not going to happen.
Who does it hurt the most? The poor and what is left of the former middle class.
The person that drives the Lexus suv or the Hummer could care less how much gas is a gallon.
The only good point from all of this? It will force the US to seriously consider alternative “Intelligent” fuel sources (corn is not the answer!)

Tully is wrong. At the beginning of 1974 the price of gasoline (in Denver, CO) was about 25 cents per gallon. In less time than it took to burn up a tank of 25 cent gas the price doubled to 50 cents per gallon and never came down. Without exception, when the price of gasoline goes into a fluxuation mode, going up 2 or 3 cents per gallon, it may fall a penny, but the price has never went back to or below what it was when the fluxuation began. And it won’t this time.

OK, lets get back to reality please. When we were in the middle of the oil lines in the seventies, no one thought gas was going to ever be reasonable again. When we were in the middle of the tech stock bubble, no one thought we would see computer programmers out of work. When we were in the middle of the housing bubble, everyone had a house waiting to flip. So now all the focus is on oil. Let is go. Oil will fix itsself, wether it be a replacement technology or alternative fuel or tiny cars, change will come, we just get caught up in the now that we can’t see the future. The increased demand from china and india and other countries didn’t happen overnight, but the oil jump sure did. This, if anything says the greater demand is not really the price mover, greed is. And greed always leads to the regular guy getting burned.

Supply and demand forces, in the long run, will always work. However, in the short term, havoc may rein. I think we are all asking ourselves at what price we will stop driving a large inefficient gasoline engine. Based on the number of large gas guzzlers on the highways, $4 gasoline isn’t it. At some price point, however, we will all change our wasteful ways. I lived in Europe for 17 years and saw the effect of $8 to $9 dollar gas on a daily basis. Virtually, no SUV’s, pickup trucks, large gas guzzling vehicles or large RV’s were on the road. But, the highways were still full of smaller cars traveling at much faster speeds. They coped with it, so will we. Get ready America, large inefficient vehicles are going the way of the dinosaur. Personally, I think it will be wonderful. I can then buy my 300 mpg vehicle and not feel threatened by the SUV’s and other large vehicles on the highway. Safety has always been a big limiting factor in the purchase of a small vehicle in America. But, $12 gallon gas will solve it. Supply of both oil based efficient vehicles and alternatives will flourish. At the same time, demand will sharply diminish due to the insanely high price of oil and gas. Still, in the short term havoc, you might want to have some oil driller stocks in your portfolio.

Tully’s attempt to draw parallel between housing and oil is flawed from the outset and his conclusion mirrors his argument. He uses no data to support his claim of oil production increases, touches on shale, tar sands which are expensive and energy intensive (i.e.- why use 2 gallons of fuel to create just 1). He does touch on the poor state of energy infrastructure (yes, steel rusts and the last 20 years have seen little investment because the price of oil was so low).

So we have demand rising in other nations (subsidized or unsubsidized, demand is rising) and 3rd world nations want their oil too, poor infrastructure investment, depleting oil fields, little oil fields found, and significant time delays b/n planning a refinery and it going on line.

Tully should probably do more research before drawing uncompelling positions.

Hasn’t anyone heard of Bohai Bay or the huge oilfield in the Gulf in water too deep to currently bring on line immediately but will be be online in about three years? Futures are predicting crude to be lower in 5 years than it is now.
Perhaps the govt. could find a way to get Big Oil to expand refinery capacity which would increase end user supply and alleviate the financial crunch on the least solvent in America?

Tully’s argument is convincing, but I am compelled to point out out one flaw in his reasoning. Unfortunatley, modern society relys on oil as much as human beings rely on air and water. Frighteningly, there does not exist a market equilibrium point, because there is simply no viable alternative to oil right now… in the future, yes, but not now. The situation is like that of a man thirsting in the desert. The price of a glass of water is skyrocketing, and the man will die with out it. He is left with no choice but to buy the water, no matter the price. There will never come a point when people won’t be willing to buy oil because like water society will be sent back to the stone age without it… the question is not a matter of willingness, but rather necessity. I believe we as Americans must take preemptive action and commence drilling of our own domestic reserves, while at the same time investing considerably in a alternative energy technologies

Many “experts”, including the representatives of the major US oil companies that recently appeared before Congress, say that the “fundamentals” don’t justify the current high oil prices. What are those fundamentals? I suspect that they are referring to the marginal cost of oil, as does Mr. Tully. I also suspect that they may be thinking of the historical responses to price increases, i.e. the historical supply-demand “curves”. The problem is that those old curves no longer apply.

The problem now is time. The suppliers aren’t finding oil as fast as the demand is growing. And, the new petroleum “finds” are usually in hard to develop places (e.g. deepwater, permafrost regions, African nations with little support capabilities). The alternative hydrocarbon sources (e.g. tar sands, shale oil, coal and gas to liquids) take even more time to develop. So effectively, the supply curve is essentially a vertical curve set at the current production capacity. And evidently, the demand curve says that $140/bbl is the price the consumer is willing to pay for that amount of oil.

The other change in the “fundamentals” is on the demand side. Yes, in the past, the US demand went down quickly after the oil price spikes in the seventies. This change in the US demand had a major influence on the overall demand so that the overall result was a reduction in the entire demand curve. Now, even though the US is still the major consumer, decreases in the US demand are being negated by similar increases in the developing countries that are subsidizing the price of oil to their people. I suspect that the demand from the developing countries will continue to rise as fast as or faster than we can bring the alternative hydrocarbon supplies online. China and India can probably continue to subsidize the oil based on their future growth in GNP, just as the US subsidized the railroads in the 1800’s. Thus, we will probably have high prices for 10 to 20 years until we get enough production of transportation fuels to easily satisfy demand.

I agree that oil prices will tank eventually but I believe we are going to be waiting a long time for that to happen. As far as alternative fuels being expensive to produce, this is true as far as current technologies and infrastructures are concerned. When technologies and infrastructures are in place to produce energy cheaply then this will not be a problem. There are several things that I see happening now that gas prices have risen to over $4.00 a barrel. Consumers will cut back, but so will production or at least the share of production that comes to the USA. So prices will not fall. Everyone will be trying to capitalize on the opportunities to develop renewable energy. This will take time but we have abundant power from solar, wind and other sources that are just beginning to be tapped into and looked at. The argument that hydrogen is expensive to produce and that it takes a lot of energy will be negated by the fact that once the infrastructure is in place the energy will be very cheap and renewable, at least as long as the sun lasts, and we will not only have a plentiful supply but the environment will benefit in numerous ways as well. I, personally am excited to see the oil prices this high as we will be seeing many new developments in the coming years that will benefit mankind for years to come… now if we can just stop making war…

Mr. Tully is right on the mark. Oil prices will come down and a lot of small investors will lose their portfolios. The main force driving the price of crude up is the investor who’s only game in town right now is oil prices. No one wants to realize 8% to 11% gains anymore. They want to double and triple their money and hedgeing on oil is doing that now. There wil be a surplus. Oil is worth somewhere between $40 and $60 a barrel not $ 120 to $150.

Tully may be right and I hope so. I do remember the price of gasoline going from $0.35/gal to $0.85/gal in the late ’70’s & early ’80’s when the price of a barrel of oil doubled. But when the price of crude went back down, the price at the pump didn’t go with it. . . . it stayed at $0.85 and continued up from there!! Guess what. . . the oil companies doubled their profit and the public didn’t even notice!!

I was born and raised in Oklahoma by parents who have worked in the oilfield their entire adult lives. I remember the bust that came in the mid 80’s, and it was very painful for our family, but we survived. My parents still work in the oilfield, and the last several years they have fielded questions about why they haven’t followed the trend of their fellow oilfield workers and built a big, new house and bought fancy cars, or boats. Their answer: The oil industry has times of boom and bust, and has since the beginning. We remember the last bust, and when the next one comes we’ll have our paid-off house and our paid-off cars, and our savings in the bank. Like my dad has been saying, this market won’t last much longer; the boom will come to an end and the bust will begin. It’s just a matter of time. Which side is right? The simple truth is that nobody nows for sure. Like everything else, it’s all in God’s hands, and we’ll all just have to wait and see.

Tully is probably correct but the question is when? With China and India now in the game, demand will increase faster than ever before.

At the same time it will take 5-10 years or more to get new sources of energy and oil on line.

Between now until Tully’s correction we could have a depression that would make the 1930’s look like a picnic.

Apparently most people still don’t realize all these alternative fuels are useless. Ethanol takes more energy to produce that you get out of it. Same thing with virtually everything including hydrogen (you don’t just pull that outta the ground). The problem is oil is not something we can easily replace with so many applications.

The very fact that we’re resorting to tar sands and oil shale proves that we’re in trouble does it not?

Mr. Tully makes real sense at first glance. He well states other examples of bubble to bust scenarios.

However, I do not believe his example cases compare well to oil.

Take housing, for example. The oversupply of houses cannot be applied to oil. Why? Because the house continues to remain residually. It does not get “consumed” as oil does.

Homes built continue to exist in inventory. And while population increase does “eat” into that inventory eventually, it does not eat inventory like oil.

Oil is burned or put into consumeable products in manufacturing. And then it is gone.

Homes are built largely from timber, which are renewable, with proper care and planning.

Oil is not renewable. And the inventories are eaten by population increase, economic growth (globally balanced), and are reduced by natural oil reserve declines, which means current production must continually be replaced just to maintain status quo, not to meet increases in demand.

There are net, 80 million new people in the world each year…meaning the USA is matched in population every 4 years. Most of those people are born in third world or developing nations.

With just minor to moderate consumption of those developing nations, it puts enormous demand on supply, which is more demand than can be conserved in developed nations.

And while we will see Shale, Tar Sands and even Coal converted into oil, it will be increasingly expensive. In addition, you cannot extract these resources like oil. You can’t punch a hole in the earth and sip it out like a straw. It requires mining techniques followed by refinement and heating that can never produce oil as plentiful or economically as traditional and conventional oil production.

Energy is the backbone of all economies. It is the modern slave or beast of burden which pulls, pushes and drives our technologies. It’s true value has never been realized, it has always been taken for granted that somehow supply will always be there, somehow.

This faith in supply and demand economics has left us without plan B.

So, what is the bottom line? The bottom line is that oil will continue to be expensive. And that is will eventually be alternative renewable sources that will be the answer.

So, what is the solution to expensive oil? The solution to expensive oil is “expensive oil.” Only with this high level of price will it finally provide funding and incentive to really tackle the problems and challenges of alternative energy.

If it isn’t painful enough, and energy is cheap, we will never make the move, we will never invest in it, we will never find it ‘necessary.’

So, folks, get ready to spend a lot in the years ahead on your energy slave, but you can find some peace in the fact that you are now part of the solution.

Tully is wrong. Economics are NOT the only factor in oil supply. As well as all the factors (correctly) stated by David Rezachek, there is also the Energy Return On Energy Invested (EROEI) ratio. It takes energy in the form of electricity (which itself has to come from oil, gas, liquid fuels, nuke, hydro, or renewables) and liquid fuels to produce oil.

Energy is expended in the exploration, exploitation, and refining phases of oil production. As a field ages it takes more effort and therefore more energy to produce each barrel. Synth-oil sources such as coal, shale, bio, and tar-sands require far more energy to produce than a natural (and young) oil field.

Meanwhile, a barrel of oil has a fixed energy content. When the energy expended to PRODUCE a barrel of oil exceeds the energy IN a barrel of oil it will not make sense to take it out of the ground. It is irrelevant at that point what the monetary value of energy is.

Lastly, claiming that synth oil supplies can replace the multi-million barrel per day production rates of the world’s oil fields is fantasy. Tar-sands, shale, and coal based fuels are the “bottom of the barrel” (no pun intended) in terms of preferential sources. Pointing to their value is itself a sign that we are getting desperate, and that the days of profligate, cheap crude are over.

Tully, your scenario will occur the day after hell freezes over.. the oil producers who control the flow valves will regulate the oil flow to keep that “last equilibrium price” at a level with which they are comfortable. Oil is their ONLY resource and they have hired some of the best brains on the planet to manage it. Do not hold your breath, we USA, have the shortest memory spans of all homo sapiens and conservation is not in our DNA.

Oil as a commodity is currently running under a different set of rules. Namely scarcity economics. Not supply and demand. Going to be VERY volatile until the industry proves it can supply all the world needs.

I think if OPEC seen the price begin to tank they would cut production, Saudi Arabia alone could cut production by 4M barrels a day and still make 10 times the money they were making less than 10 years ago!!
Ask yourself what would you do if you were CEO of OPEC, keep producing at current levels and make $100m per day or cut production and make $150m per day?
We cannot compare housing and oil as housing supply is not controlled by OPEC and we cannot bring on new supplies that would come close to what OPEC could comfortably cut.
Like it or not this is the reality of today’s oil market, alternatives are our only hope.

Oil is unlikely to “tank”. It may trade in a range, but the trend will continue upward and remain at the highest sustainable level due to supply & demand. Global supply has basically been flat for the last 3 years. The 1st half of this year, US demand was down, but the price of oil continued upward because of increased demand by other countries.
The comparison with the Tech and real Estate bubbles is erroneous.
Tech was speculation in intangible and unnecessary assets. Real estate was speculation with low cost, borrowed money in tangible but optional assets. Real estate is optional to the extent that low cost alternates are readily available.
Oil is both tangible and necessary in a modern industrialized world. The entire global transportation system along with all the supporting infrastructure is based on liquid fuel derived from oil. There is no economically available alternate currently available. We are in denial if we think high cost gasoline is a temporary aberation.

A couple of people are saying that cost of production will prevail. I’m afraid we need an economics lesson (or have you never bought popcorn at the theater?). Cost to produce is irrelevant. There can be no equilibrium price for oil as supply keeps going down and demand either keeps increasing (as it has to this point) or decreases more slowly than the decrease in supply.

With gold, the price can go up because people can buy it to hold it. They can put $1,000,000 of gold into a safe and keep it there. Oil? Not so much. I can’t put $1,000,000 of oil in my garage. Hysteria can only move oil $15 or so. The rest is the actual supply/demand equilibrium.

The true price of oil today is probably about $132. The true price by the middle of the summer will probably be about $145. The true price by the middle of next year will be close to $200. Past that, nobody can predict.

We have no idea what drastic measures the world will put in place to adjust to $200 oil. Perhaps a bunch of people who are much smarter than me will come up with some oil-saving ways of doing things and demand can finally begin dropping as fast as the supply is currently dropping (see “peak oil”).

The only guarantee is that we don’t stockpile oil in our garages and this is not some sort of bubble. This is hand-to-mouth consumption, and the price of oil is fundamentally correct and going nowhere but up in the short- to mid-term.

I believe that prices will surpass $150 a barrel before tanking. They may even reach $200. We the people must lean on our government to get off their dead arses & allow exploration & drilling in Anwar & off the coasts of Florida & California. We should explore the oil shale out west. Then we can take the U.S government’s share of the money to explore alternative fuels. $4 & $5 a gallon gasoline will have a very negative effect on our economy. We are already seeing unemployment skyrocket. rising fuel prices along with the ultra stupid idea of using a food staple like corn to make an even more expensive fuel. The idea for an alternative should be lower prices as well as lower emissions. Once we become energy independant, the world price for oil will drop like a rock. Alternative fuels are the wave of the future, but our government must realize that the future is not today. DRILL NOW!!!! GIVE OUR CITIZENS SOME RELIEF!!! Make it known to your elected representatives that they will be job hunting unless they support domestic drilling.

There’s a critical difference between housing prices and oil prices. The supply/demand mismatch for housing was based on time delays; it took awhile for demand and supply to meet, but ultimately you can build any desired number of houses required by demand. Oil isn’t like that. There’s a fixed supply. We’re years if not decades away from having large enough quantities of oil from shale or tar sands or coal to make a dent in the demand — permits and licensing alone make that a certainty. So we’re that far away from having any long-term relief from high oil prices, short of a huge drop in demand. That’s what’s really going to restore the balance in the short term through economic disruptions and dislocation.

After reading the first three comments, Tully appears to be bang on that people are being swept up by the hysteria. While prices could go much higher — for both economic and geo-political reasons — the marginal cost of production will prevail. It always does.

Yes, I think the author is correct, in principle. The key here is to realize where the opportunities lie; in getting in early on developing the technologies that will bring down oil usage world-wide, be it via solar panel technology, plug-in hybrids, clean-coal tech or whatever it may be.

However, as the author points out, oil is subsidized in several parts of the world. Until people in those places face having to pay $125/barrel, there’s a significant risk that change won’t come as quickly as it should.

We all know the markets follow a herd mentality. After the subprime bust last fall, everyone headed over to the commodity markets to try to continue making the returns they weren’t getting in stocks any more. Since then, the price of commodities have spiked, particularly oil and food. Put two and two together. This won’t work itself out until the government (CTFC) steps in or the herd stampedes in the other direction. Meanwhile, I am afraid the rise in oil prices is going to perversely work to keep the market flat, whereas the market doing better might serve as a natural draw to take some of the froth out of the commodity markets. I have only recently started seeing business journalists touch on these subjects, so congrats on this piece — I think you are dead on, except I’m not so confident the market will behave in its best interest.

Tully is right and pigs can fly. With crude rallying $10 today the market apparently does not agree.

Shawn’s position fails to account for the fact that oil is not widgets, you cannot just open the taps more when the price escalates. There are real geological, political, logistical and other constraints that are holding back production. Full disclosure – I believe the Peak Oil theory is correct and we are near that point. With that said, the empirical evidence for increased production in relation to increased prices is very weak – we have essentially plateaued since 2005. The new projects mentioned in the article are not projected to replace depletion in existing fields much less increase production. The tar sands in canada for example require vast amounts of water and natural to process, and will be limited by these constraints. Further, the return on energy invested decreases with all the new extraction methods referenced.

Prices will probably fall back as profits are taken but the long term trend is up. This is disastrous for those who believe oil will remain cheap. GM is in severe trouble, Ford says expensive oil is here to stay, and the airlines are retiring fllets of older aircraft. They believed oil would stay cheap and now they are in trouble.

Sorry Tully – this time it is different – it is not a replay of the past. In the past the US and Europe were the only real consumers and drivers of demand. Now we have developing nations with much larger populations in play. Also – new reserves take a long time to develop and “peak-oil” is probably a reality. You like to talk basic economics? It does not get any simpler than higher demand and lower supply…

Tully is most likely wrong. Comparing the price of silver which was driven up by the the Hunt’s trying to corner the market and the subsequent drop to around $4 an ounce when the demand dropped and camera film no longer needed Silver is not the same as the insatiable demand for oil in 2008. The demand for silver dropped. For oil to drop we also need a drop in demand. When foreign governments subsidize the cost, the demand increases. This is what is happening now.

Unlike silver the demand for oil is growing every day not only in China and India but also many other locals throughout the world.

What would put a dent in the price is a change in the ineptitude of politicians from both parties. They need to immediately begin working to make us as energy independent as possible. We need government incentives to put up Wind Farms all over the country where feasible. Instead we get politicians saying “not in my backyard”. We need incentives to produce more hydropower, geothermal power, make solar available wherever it is feasible.

We need to produce oil from proven reserves found in the 1970’s and 1980’s off the coast of Santa Barbara, California, Alaska and the Gulf of Mexico as well as the more difficult areas such as the Dakotas.

We need to accelerate the mandated fuel standards for motor vehicles and the States need to work with the Federal Government to work comprehensively on mass transportation. We need bicycle paths like those in certain areas of Cape Cod. We need to build nuclear power plants again.

Frankly there are a multitude of things that should and could be done. However, our government leaders from both parties have been inept in this extremely important area for the last 25 years. Yes this includes both Bill Clinton and George Bush.

We will run out of oil. The only question is when. And if we don’t have an alternative at that time, guess what.

Wilkes Barre, Pennsylvania recently put up a wind farm which produces enough power to produce 100% of the energy needs for 6500 homes. Bravo. Those responsible are to be commended. Why can’t this be replocated over and over in the United States.

Once these steps are taken throughout the world, oil prices will come down. Until then there may be dips but I don’t see how the drop can be permanent.

Of course technology may ultimately find a replacement or supplement. If not we may go back to living like they did in 1850.

And to those like Congresswoman Madeline Watters from California, who think that the oil companies in the U.S. should be nationalized and that will cure the problem, wake up and do something productive rather than trying to blame somone else for our problems. Buy a mirror, look into it and you will find the problem. It is you and most of your fellow elected oficials from both parties.

Lower oil prices. I think not. But who knows. Maybe a miricle will occur and our elected politicians will actually do what we elected them to do. Maybe. Nah.

I am the guy who pays $4.00 per galon and hates it. The thoughts discussed in this article may be a correct way of thinking but even in that scenarion it will take 5-10 years for all these developments to heppen, and in a mean time the prices will go further up, and regular people will have to deal with it.

It is apparent that Shawn Tully has been sniffing some of the more volatile components of crude oil if he thinks the price will ever go back doen to %50/bbl.

A number of factors affect the price of oil. These include: (1) increasing demand; (2) demand is increasing faster than production; (3) excess production capacity is at record lows; (4) new discoveries not keeping up with demand growth; (5) supply disruptions due to geopolitical events; (6) fears of terrorism, (7) weather, and (8) speculation.

• Demand for oil is steadily increasing, at a rate of about 2% per year, while production from existing oil fields has been declining by 3 – 6% per year.
• Fifty four of the 65 largest oil-producing countries in the world have already passed their peak production and production is now in decline. Five years from now, five more of these producers will have reached their peak production.
• Global oil production is expected to peak early in the 21st century. The projected peak production is somewhere between 2003 and 2020, with an average date around 2011 – only four years from now.
• World excess capacity is near record lows and is concentrated in a few OPEC countries.
• Oil reserves are being rapidly depleted. And, new discoveries have not kept pace with depletion of reserves. Current demand is > 30 billion barrels/year. New discoveries are only ~4 billion barrels per year. You do the math.
• There is only a finite amount of oil.
• There are a large number of trouble spots in the world, and many of these trouble spots are major oil producers. Trouble in any of these spots has the potential to disrupt supplies.
• Fears of terrorism have been fueled by recent attacks on oil personnel and facilities in Nigeria, Saudi Arabia, and Iraq, …
• The Gulf of Mexico is the source of much of the U.S.’s oil supplies and the Gulf Coast the site of much of the U.S. refining industry. Supply disruptions followed Hurricanes Ivan and especially Katrina.
• Some say that much of today’s higher prices are due to speculation. This is undoubtedly true. Oil prices convey “the market’s evaluation of scarcity.” Oil is a valuable commodity that is in great demand. And, it is becoming scarcer, and more valuable.
• And, finally, OPEC will never allow prices to go down to $50/barrel.

All of these factors suggest that high oil prices are here to stay, and much higher oil prices are likely in the future.

The argument that because of government subsidies, people in China and India are over consuming oil is dead wrong.

No matter what is purchasing power parity of a country’s currency, everybody pays the same price for crude oil. Gas costs about Rs. 50/liter, that is about $5/gal in India. That may not sound much for a person in USA. For a person in USA, that is one hour wages at McDonalds. For a person in India that is a days salary for a teacher or a bank clerk.

I think Tully’s right. People are not driving as much. They are looking at alternative fuels. And there is that old saying “What goes up, must come down.” So far that has proved to be true in everything I’ve seen.

So oil production is declining because those pesky Russians and Venezuelans lack the know how to manage their oil fields properly. US continental oil production is less than half of what it was in 1970; the North Sea is no longer pumping as much oil as it used to, Norway’s North Sea production not long ago fell 9% yoy (?). So it seems that it is not only the Russians and the Venezuelans that can;t manage their oil fields properly. The Americans, British and Norwegians are even worse, because their production has declined for far longer without remedy.
Of course, if Tully would say it is different – local peak oil has hit in these fields – what makes him so sure oil will be <$50/bbl a few years hence after peak oil has hit Russia, Mexico, Venezuela and even S. Arabia?
Because everyone will be on bicycles?

Absolutely correct. It is basic economics. We’ll survive $4.00 gas and in two years it will be $2.00 -$2.50 again.

While the author is correct about the supply side dynamics of oil and other markets, what he is failing to factor in is the demise of the US dollar as a currency. Unless the FED acts fast to raise interest rates and restore the value of the dollar, oil will set new highs that make today’s price look as cheap as water.

Housing materials aren’t in limited supply, as is oil. The artificially induced silver price esclation in 1980 was due to the Hunt brothers. Oil is a limited natural resource, and historically, as alluded to in other comparisons in the article, gas prices have continually increased.

Great Job, Shawn. I agree. Oil price will definitely crash in the near future. High oil prices will kill demand like now. Most people are stupid, they look at the EIA weekly inventory number and say well crude oil inventory going down, so we must buy more oil.
No NO NO. Oil inventory going down because it’s too expensive for refiners to hold oil inventories when oil is at $135. Holding inventories cost lots of monet. High price will cause inventory going down, not up.

Demands have fallen 5-10% this year, EIA’s number is not accurate. We are probably having 5-6 million spare capacity at $135 per barrell with significant more supplies coming online