Comments on: The $4/gallon solution

By: Ian Whitchurch

Ian Whitchurch — Sat, 18 Sep 2004 00:31:23 +0000

I’m not sure that a, say, 10% US fall in demand would do that much to the stress world oil is under. The guy to read on this is Matthew Simmons btw … he’s a Texas Republican, sat on the infamous Bush Energy Task force, and he thinks the era of Cheap Oil is over. On the supply side, we have a number of big fields in decline, notably the North Sea and Prudhoe Bay. I think the new licence round in the North Sea will help, as the Juniors actually drill stuff, as opposed to whine about depreciation allowances … the model is the South Australian governments’ forced divestiture of the Cooper Basin exploration coutry by Santos, which is reversing the oil production decline curve of the Cooper even as we speak. It wont last though … much as I like Worrior, Christies and Arwon, Tirrawarra they aint, and that will be the North Sea experience as well – some small to medium sized new fields, but all the giants around there have been found. Daquing is a worry as well … it’s China’s biggest field at about a million barrels a day (thats over 1% of world production) and the local engineers were signalling a 7% production fall each year for 7 years. A CNOC VP then got sent out, and he is saying ‘No production decline ! Norms will be met !’. Plug “china daily daqing production” into Google and you can watch the change in line. Stressing a field by overproduction leads to lower total recoverable reserves btw. Then there’s Ghawar, which delivers 4 million barrels a day. They’ve been pumping seawater into it for 20 years, and sooner or later they’ll stop getting oil and start getting seawater back. On the demand side, it’s being driven by China, India and Indonesia. A hint to the future is the rise in absolute and per-capita South Korean oil demand in the 1980s. Mrs Chen now has an air conditioner, Liu the peasant a moped to take his chickens to market, and Han the factory worker has just bought his first car. All this creates oil demand directly, and indirectly as increased electrical power demand leads to brownouts, which leads to factory owners buying diesel generators to provide power when the grid goes down. I’m expecting total Chinese and Indian oil demand to continue to increase by 1 mmbo per day per year. In the face of that, a US fall from 20 mmbo/day to 18 mmbo/day just compensates for 2 years worth of Chinese/Indian demand increase. Me ? I’m putting together an oil company to work up a Cambrian basin that looks a lot like East Siberia, except it’s smaller and lacks the pine trees and permafrost :) Ian Whitchurch

By: Giles

Giles — Fri, 17 Sep 2004 23:35:47 +0000

“more like LA than NY” Interstingly that more a description of style. The greater LA population density is 6,000 vs New Yorks 4,000 per square mile. Australia varies from 4,000 for Sydney to 2,500. In fact there aren’t any Euorpean level compact cities in the US or Australia (London is about 15,000 – and Hong Kong ten times that!) http://www.demographia.com/db-worldua.pdf

By: Alex

Alex — Fri, 17 Sep 2004 18:46:03 +0000

Too academic-oriented and right brain oriented I guess to have much real world experiences and real smarts here.

By: John Quiggin

John Quiggin — Fri, 17 Sep 2004 00:43:16 +0000

Australia’s population is best described as suburbanised – more like LA than NY. On debt/exports, Australia is high but relatively stable, US is moderate but climbing fast. Both are vulnerable to a shift in sentiment.

By: Giles

Giles — Thu, 16 Sep 2004 19:20:16 +0000

“But the US population is much more evenly spread across the country than the Australian.” More specifically the Australian population is more urbanized than the US and so better able to make use of public transport. So given that Australian petrol consumption should then be more elastic than the US and given that the ratio of external debt to exports for Australia is higher than the US - shouldn’t it be Australia imposing a higher petrol tax?

By: Matthew2

Matthew2 — Thu, 16 Sep 2004 10:33:10 +0000

By: Alex

Alex — Thu, 16 Sep 2004 05:20:25 +0000

And My other thinking about some feasible solutions is not as much out of the box.

By: Alex

Alex — Thu, 16 Sep 2004 03:57:39 +0000

Very, very good discussion. Again, please over several weeks time. I agree with raising price of oil & gasoline re usage in this country. Many here are smart. One principle I have been thinking about (for long enough for attribution to me). U.S. should demand x% factor(when certain countries are buying our treasures and paper) as a form of Tribute money for providing military protection to those several countries. Seems to me fools to be following old theories for too long and not adapting, while allowing those same several countries to screw us over re trade practices. (You’re also dreaming if think there is really free trade, invisible hand, rational choices, etc. with those certain countries and their markets have been open to this country.

By: John Quiggin

John Quiggin — Thu, 16 Sep 2004 01:44:40 +0000

“As the US has a more dispersed population than Australia” This would make a nice topic in itself. In terms of population per square kilometre, the reverse is true by a factor close to 10. But the US population is much more evenly spread across the country than the Australian.

By: self

self — Thu, 16 Sep 2004 01:43:03 +0000

Let me clarify the questions above. Does the increased sales of shorter term securities reflect FCB preferences consistent with segmentation theory of term structure ? The point being that’s where the money is. Or is the shortening of borrowing terms reflecting a more activist strategy of Fed borrowing consistent with statements by Bernanke earlier this year ? And does the concentration of FCBs with such preferences in short-term securities tilt the vulnerability to sentiment reversals one way or the other ?

By: self

self — Thu, 16 Sep 2004 00:21:24 +0000

By the way, I noticed John’s comment about the US shortening the terms of its borrowing on Setser’s site. Is this a reflection of foreign central banks preferences or the US central bank preferences? I recall this being a topic covered in Greenspan’s recent testimony (House, I believe). His point was that if FCBs were to start selling they comprise a small overall percentage of short-term notes so not to worry. How does this play into concern about vulnerability to changes in sentiment ?

By: self

self — Thu, 16 Sep 2004 00:04:19 +0000

Thanks from me as well, the Setser link looks worth checking frequently.

By: Giles

Giles — Wed, 15 Sep 2004 23:04:04 +0000

Other major objections; as I understand it, by 2010 the production of the US in oil is likely to have fallen even further. Second round effects might include a widening of the deficit in cars since foreign producers are better at producing fuel efficient cars than the US. Thirdly, as the US has a more dispersed population than Australia, I expect the output elasticity is going to be much higher.

By: John Quiggin

John Quiggin — Wed, 15 Sep 2004 22:44:38 +0000

Glory, thanks for the Roubini and Setser reference. I’m pleased to see that their detailed analysis matches my back-of-the-envelope almost perfectly.

By: Randolph Fritz

Randolph Fritz — Wed, 15 Sep 2004 22:20:15 +0000

“Approx. 70% of all goods are shipped by truck. Not to mention goods shipped by plane. The increase in transportation costs would increase the costs of all goods.” Given time, ground freight would be shifted to using the rails. Air freight is a very small part of shipping. The long-term outcome is probably going to be the collapse of the dollar on international currency markets, leading to multiple major global currencies.