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Tilting at Windmills

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May 12, 2008
By: Kevin Drum

AN OIL BUBBLE?....I don't really have any good reason for posting this chart, but reader Jonathan C. sent it to me and I thought it was kind of amusing. Every month the Energy Information Agency releases a near-term energy forecast, and as oil prices have been skyrocketing it turns out that the EIA has been a model of consistency: every month they predict that oil prices have peaked and are about to start declining. In May the EIA analysts got a little frisky and predicted a plateau for the next few months instead of an immediate decline, but needless to say, the market failed to cooperate. Prices continued to rise.

So take the EIA forecasts with a grain of salt. The problem is that they, like many others, seem to believe that we're in the middle of an oil bubble that's being sustained by reckless speculators. My own hunch is that although speculation may be playing a role in the current runup, it's only a small one. Fundamentally, prices are going up because demand is growing and supply isn't. Paul Krugman agrees, and points out that artificially high prices can't be sustained for long, since eventually supply will go up and demand will go down, breaking the bubble:

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.

But it hasn't happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn't the result of runaway speculation; it's the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.

The lesson of those EIA forecasts is twofold. First, trying to predict short-term price fluctuations is a mug's game. They might go up, they might go down, and nobody knows which. Second, the overall trend is nonetheless up. Eventually, high prices will reduce demand and prices should level out a bit, but this might take a while since energy consumption is famously inelastic in the short term. But that's what it's going to take: change in the real world. This isn't a bubble, it's Adam Smith in action.

Kevin Drum 1:16 PM Permalink | Trackbacks | Comments (52)

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Comments

What has happened in India and China that has caused the price of oil to double in a year? Oil prices are going to go up as other countries grow, but to my knowledge nothing has happened in the last year to spark this sort of rise.

Posted by: Sojourner on May 12, 2008 at 1:22 PM | PERMALINK

I know of one group hoarding: The US Federal Government. We are still filling the Strategic Petroleum Reserve.

Posted by: VOR on May 12, 2008 at 1:34 PM | PERMALINK

A cynic might suggest manipulation of crude prices now so that prices at the pump can come down later, say a few months before the election.

Posted by: K on May 12, 2008 at 1:38 PM | PERMALINK

Well, at the risk of offending anyone & everyone who lives in places where there aren't really any alternatives to getting in your car and driving the 20+ mile round-trip to earn a paycheck, the biggest problem with the price of oil is that it doesn't cost nearly enough. Well, not enough to get people to live closer to the things they need, to use mass transit where it's available, to carpool, to ride bicycles, or even to (gasp!) walk. Those things won't do much for the cost of food & other goods that we need shipped to the places where we live, and won't do much for the increasing cost of petroleum products other than gas, but it would make a pretty big difference.

Mkay, I'm done with my liberal rant for the day. Feel free to move about the aisles.

Posted by: junebug on May 12, 2008 at 1:43 PM | PERMALINK

What has happened in India and China that has caused the price of oil to double in a year?

On top of the two wars raging in the Middle East, hundreds of thousands of newly-minted middle class Chinese and Indians with cars.

Also, breakneck construction. All of those cranes, bulldozers and tractor-trailers transporting raw material need fuel to operate.

India is in the middle of building a national highway system.

Posted by: electronic janitor on May 12, 2008 at 1:47 PM | PERMALINK

Junebug,

I belong to the group that will be offended by your rant. At the same time I have to admit that you're right. But here I am with 4.5 years left to pay on my Ford Extinction, and I can't give my house away to move closer. It's a lousy situation.

Posted by: thersites on May 12, 2008 at 1:48 PM | PERMALINK

Speculation and the low US dollar are the prime drivers of higher oil prices. Sadly, I don't an end in the near future too many people are making oodles of money.

Posted by: JerseyMissouri on May 12, 2008 at 1:54 PM | PERMALINK

Suppy, demand, and speculation are not the only factors affecting the price of oil. The value of the dollar has an effect too. If we had a stronger currency, we see less of a hike in the price.

Posted by: JJF on May 12, 2008 at 1:59 PM | PERMALINK

Junebug, I'm one of those folks too, and well, you're right, but it's worse than how you portray it.

I live in a part of the country that if it wasn't for the country's biggest nuke plant (and one of its worse) could absolutely not sustain the population it currently has. That's not all. We of course also have a shortage of water, and in case there really was a calamity, actually a shortage of roads to get the hell out.

(It's not my choice that I live here.)

It's fundamentally a piece of land that is inhospitable to life and we should probably not be building or living here unless we all agree to go nuclear. (Solar is a possible alternative, but not wind or geothermal or hydro).

The free market will fix everything in the long run, or so I am told, but until that happens, expect people to live and use and occupy and consume in what are spectacularly silly or selfish or both ways.

So I agree with you, I wish that oil had been more expensive, much more expensive starting in 1980 when Reagan won and undid Carter.

And while Krugman is my pole star, I still don't understand how demand caused oil to go from a shocking $100 per barrel a month or so ago to a boring $122 per barrel over the weekend. I think that's more psychology/greed based than just some rational effect.

Posted by: jerry on May 12, 2008 at 1:59 PM | PERMALINK

My bet is that a significant portion reflects the decline in the value of the dollar. Subtract that effect and remove the bit of speculation and oil prices are less than have their current price. Of course to admit to that, the administration and Fed would have to admit that our economic houses is not in order. Better to blame unknown forces. Sort of like -- 911 happened because they hate our freedom.

Posted by: steve on May 12, 2008 at 1:59 PM | PERMALINK

Remember when that crazy Al Gore was running for president, and we were going to have carbon taxes? Jeepers, what if that had happened? We'd be in trouble, now, wouldn't we?

Posted by: thersites on May 12, 2008 at 2:13 PM | PERMALINK

junebug - ignore Thersite's anti-ranty, he is just feeling supremely guilty because he fell for the "real men drive extinctions" thing.

With respect to the bubble, I predict that it will get dark this evening after the sun goes down.

Posted by: optical weenie on May 12, 2008 at 2:15 PM | PERMALINK

In the bankruptcy part of my practice, I am often confronted with examining the budget of a debtor who can no longer afford Chapter 13 payments. A few months ago we were using $3.00 per gallon as a working number in the budgeting process. We are now using $3.60. That is a 17% increase in the cost of gasoline. That doesn't count increased food prices. Very few of my clients are making much more than they were at the beginning of the year. If my clients are any indication you can rest assured Americans are hurting.

I don't think gasoline prices or the prices of commodities tied to oil (food and just about everything else) are going down anytime soon. At the same time I don't see many workers able to negotiate higher compensation. Labor is cheap and getting cheaper. Next stop--second world. A few rich people and a lot of peons.

Posted by: Ron Byers on May 12, 2008 at 2:17 PM | PERMALINK

How will our economy look when gasoline is so expensive people drive to work and the grocery and little else? Sure, more fuel efficient cars will eventually soften the blow to the wallet. But in the meantime it seems many people will lose jobs dependent on customers getting there via a car. Resorts, sporting events, museums, amusement parks, entertainment of various types. Then we have the downward spiraling effects those lost jobs create. I might want to drive from Louisville to Cleveland to see that fav music artist not appearing any nearer to me than that. Then again the cost of the gas may very well nix the trip. Things may get very bad during this national period of adjustment to peak oil and the competing demands of overseas buyers. I fear some bad times are nigh.

Posted by: steve duncan on May 12, 2008 at 2:25 PM | PERMALINK

"Remember when that crazy Al Gore was running for president, and we were going to have carbon taxes? Jeepers, what if that had happened? We'd be in trouble, now, wouldn't we?"

Hey, whaddabout that gloom-and-doom Jimmy Carter, as well. Focusing on peace on the middle east and alternative energy supplies, whadda maroon.

Posted by: Sock Puppet of the Great Satan on May 12, 2008 at 2:26 PM | PERMALINK

Not oil speculators, but dollar speculators.

People expect the dollar to continue sliding because we cannot pay our bills.

As you know, I quit driving altogether, yet I am constantly hassled by government to pay for their gasoline bills.

Example, other than the DMV chasing me. The environmentalists set up a system to recycle materials. I use it one every two months, but the gas guzzler expects me to use it every week. So I take the can out there, using no gas, and each week the big guzzler consumes a chunk of gas as it empties my empty can.

You will see this for the next 50 years, each year the environmentalists, progressives telling me that government has to burn gas because I refuse to.

We still have make-workers in this county driving SUVs on the taxpayer dime. The efficiency with which the county uses gas is so attrocious that a lot of true environmentalists are refusing to pay taxes until the government figures out that wasting gas is bad even when environmentalists tell them it is fine and dandy.

I am constantly amazed at people like Gore telling us to burn hoards of gas because it cools us donw.

Posted by: Matt on May 12, 2008 at 2:28 PM | PERMALINK

Sock Puppet,
You're so right about Carter. When Reagan took those embarrassing solar panels off the White House, I felt proud of my country for the first time.

Weenie,
Don't mock my Ford Extinction. I was happy with my '72 Impala until those namby-pamby environmentalists took the lead out of my, um, gasoline.
But I'm doing my share to conserve. When I'm waiting in the drive-up line at the BurgerMeister, I don't race my engine anymore, even though I know it impresses the chicks.

Posted by: thersites on May 12, 2008 at 2:46 PM | PERMALINK

Matt,
Maybe you should recycle more stuff. Mrs. T and I aren't huge consumers, but we manage to fill up the bin every week.

Posted by: thersites on May 12, 2008 at 2:48 PM | PERMALINK

The facts say oil is overpriced and will come down. You are free to follow the various stories if you want.

Posted by: Bob M on May 12, 2008 at 2:48 PM | PERMALINK

Diesel hit $4.70 in NW California today. All the fuel prices are going up in 10 cent jumps now.

Some enterprising politician should launch an investigation as to why the less-refined diesel products magically went from $.50 cents per gallon cheaper than gasoline to $.50 more.

The oil companies answer is that they were somehow 'unprepared' for the low-sulfur diesel retulations... that were published 6 years ago.

Yeah.

Posted by: Buford on May 12, 2008 at 2:54 PM | PERMALINK

The reality of the market in a supply constrained situation, is that the price rises until enough people quit using (or use less of) the stuff. It has nothing to do with whether you are happy to pay the price, but whether you are willing/able to pay the price. When enough people are forced to, or choose to quit consuming oil, the price will stabilize. That is why consumption subsidies are so counterproductive, they just let the base price rise, until even the subsidized price is high enough to kill consumption.

Posted by: bigTom on May 12, 2008 at 2:56 PM | PERMALINK

Thersites,
I am not mocking your Ford Extinction. Actually I was just thinking that one way you might be able to (ahem) extend your mileage is if you slipped in a boner pill or two everytime you filled the beast up.

I observed the most incredible thing this weekend. I had a garage sale. And it turns out that the people doing the most haggling, over what I thought was a very reasonable price for the item (mostly household decor sh*t and linens, etc.), were the ones driving the big SUVs - and relatively new models too. Just goes to show you where people's priorities are I suppose.

Posted by: optical weenie on May 12, 2008 at 3:12 PM | PERMALINK

Sooner or later the whole world will return to the model of public transit between densely packed towns and villages around a train station. Freeways, big box stores, and shopping malls will become historical sites.
See England today for one example, or older US cities and their streetcar suburbs for another.
It's not just that we can't stand to burn the energy, it's that individual cars and the roads and parking lots for them take up too much space, and the world can't afford for everyone to have a car, or two..
This era will pass, just as the horse and buggy gave way to the train and trolley, and that to the gas-powered auto. We'll walk to work, to school, and the store, and today will be remembered as part of a dark age.

Posted by: GVC on May 12, 2008 at 3:20 PM | PERMALINK

My own hunch is that speculation may be playing a role in the current runup, but only a small one.

I disagree. I think commodities speculation and the weak dollar are a small majority factor (say 60% of the run up). If you look at that chart it really started taking off when they started cutting interest rates with the housing bust and the dollar starting plunging and people started buying gold, steel, etc., looking for inflation hedges. The global demand part of it is still substantial IMO. This will reverse when the dollar strengthens against the Euro, and when? China has a recession. I don't think they are immune. The Shanghai stock exchange crashed just a few months ago to about 50% of it's previous value.

Posted by: Doc at the Radar Station on May 12, 2008 at 3:23 PM | PERMALINK

Eventually, high prices will reduce demand and prices should level out a bit, but this might take a while since energy consumption is famously inelastic in the short term.

High prices also stimulate new sources of supply, but those also take a while to bring to market. Most oil supplies are subject to government controls (production has fallen accidentally in Russia and Venezuela, but the U.S. and Canada restrict supply on purpose.) Alternative energy sources are rapidly growing, but from a tiny base.

So you are basically correct: high prices for the foreseeable future.

Posted by: spider on May 12, 2008 at 3:30 PM | PERMALINK

But who could have predicted that if everyone bought a big honkin' SUV, we would start running out of oil sooner?

Oh, wait...

Posted by: thersitest on May 12, 2008 at 3:30 PM | PERMALINK

Labor is cheap and getting cheaper. Next stop--second world. A few rich people and a lot of peons.

maybe, but there is considerable demand for workers in the alternative energies industries.

Posted by: spider on May 12, 2008 at 3:36 PM | PERMALINK

Weenie: it turns out that the people doing the most haggling ... were the ones driving the big SUVs

Always been that way. When I used to work in a garage, the people driving the expensive cars were the ones who would whine the loudest about the cost of repairs. The guy driving the ten-year-old Plymouth would gladly pay ten bucks to get a tire fixed at two in the morning, and most likely tip you, too.

Posted by: thersites on May 12, 2008 at 3:46 PM | PERMALINK

If the gap between capacity and demand is large, then speculators cannot manipulate the market.

If the gap between capacity and demand is small enough, cartels, speculators and gamers all control the price of oil.

The only way to reduce the price of oil is to back demand away from capacity.

Posted by: Bakho on May 12, 2008 at 5:09 PM | PERMALINK

I don't think there is that much thought being put into it. Whatever model the EIA is using, it's been behaving the same as long as I've been paying attention.

In other words, it behaved as if 40, 30, and 20 dollars was a bubble. Someone explained to me once which model they were using and this was an intrinsic feature set by something in the model they weren't bothering to change.

Bad model, bad assumptions.

Posted by: B on May 12, 2008 at 5:26 PM | PERMALINK

maybe, but there is considerable demand for workers in the alternative energies industries.
Posted by: spider on May 12, 2008 at 3:36 PM

I keep watching for the wind farm near me. The fact is there are lots and lots of possible and even viable alternatives energy industries, but except for wasting corn that could otherwise be used as human food or animal feed and putting up a few demonstration plants, we are doing next to nothing to promote them.

How long have GM and Ford been trying to sell us Explosions and Extinctions anyway. They are supposed to be smart and should have been moving us to something a little more appropriate 20 years ago. Instead they opted to maximize profits by selling us ever larger over priced versions of tricked out citified "light trucks." As for the Japanese, ever try to find a Prius? There are lots and lots of Japanese SUVs for sale. So much for the magic of the market.

No, I am not kidding. For at least 8 years the Washington elite has been working to move us to a society just like they see in Mexico. A relatively large number of very rich people living high and wide in gated communities surrounded by millions upon millions of peons living from day to day. Who needs a middle class anyway?

Posted by: Ron Byers on May 12, 2008 at 5:55 PM | PERMALINK

Ron,
I admit frustration with all car manufacturers that they have not produced smaller cars with increased mileage standards in over 10 years.

But I think it is because it has been the consumer who has been asking for ever larger SUVs and trucks. I mean you look on the road even now and it seems that there are more and more and more huge honking SUVs out there that still have their temporary license tags on.

And so why would a car company do research to improve mileage and reduce size but still maintain good safety when probably less than 2% of their sales would target geeky nerds like me who really couldn't give a rats patooty about how beefy my ride is and care more about how much it costs to run the derned thing.

Posted by: optical weenie on May 12, 2008 at 6:16 PM | PERMALINK

Weenie: But I think it is because it has been the consumer who has been asking for ever larger SUVs and trucks.

You're half right. They make what people will buy. But they've invested a lot of marketing effort into making insecure guys like me feel as if my Extinction will make me more manly, and "soccer moms" feel as if their little darlings will be safer in one. (Which -- surprise -- ain't exactly true.) That it's been so effective doesn't speak well of the intelligence of the buying public, but they didn't have to try so hard, either.

Posted by: thersites on May 12, 2008 at 6:30 PM | PERMALINK

Thersites,
I suspect the car companies spend an awful lot of dollars doing market research to find out what it is that consumers want, and THEN target their advertising to that.
And let's face it - keeping up with/besting the Joneses has been something this nation uses as a mantra! So you can see where the market data comes from.
Good thing my neighbors aren't named Jones! Aren't I lucky? I march to the tune of my own drum. Course I've been called a nerd, a geek, a b*tch, weirdo, idiot, .....

Posted by: optical weenie on May 12, 2008 at 6:39 PM | PERMALINK

Weenie, Right I'm right there with ya -- well, okay, I've never been called a b*tch.

Posted by: thersites on May 12, 2008 at 6:45 PM | PERMALINK

How long after Dean Baker et al called the housing boom a bubble did the housing bubble actually burst?

Posted by: Model 62 on May 12, 2008 at 6:49 PM | PERMALINK

I keep watching for the wind farm near me.

Ron, I found a pdf that shows the wind farms that are current and proposed in Kansas:
http://www.kansasenergy.org/documents/WindProjects.pdf
They are going to locate them in remote areas if possible. I think there was a big wind farm in the UK that got cancelled recently because people complained about the scenery, I believe.

Posted by: Doc at the Radar Station on May 12, 2008 at 6:51 PM | PERMALINK

I suspect that Detroit bet the farm on SUVs partly because they couldn't figure out how to make a decent compact car. Before I bought the Corolla, I test drove a Ford Escort. I hated it. It was small, but it handled and drove like my father's '68 Chrysler Behemoth. The Corolla felt like a sports car by contrast, and got better mileage too.


Posted by: thersites on May 12, 2008 at 6:52 PM | PERMALINK

The lesson of those EIA forecasts is twofold. First, trying to predict short-term price fluctuations is a mug's game. They might go up, they might go down, and nobody knows which. Second, the overall trend is nonetheless up.

The real lesson of the EIA forecasts is that the government agency is lying to achieve a political objectives (nothing happening here, just move along). If it isn't the government lying about some sector of economic activity, it is private trade group (e.g. Mortgage Brokers Assoc.).

They think they can change the outcome by denying reality, and the media eat it up and regurgitate the lies. Government and Trade Assoc statistics are not completely worthless, for they point to how the powers-that-be want the news spun.

Posted by: JimPortlandOR on May 12, 2008 at 7:18 PM | PERMALINK

The UN World Economic Situations and Prospects Report 2006 notes that inflation has "edged up worldwide," mainly due to oil prices.

Catch-22 Oil prices have caused inflation and inflation debases the dollar sending investors and speculators searching for commodities as the dollar weakens which makes oil more expensive [prices rise]

Lather rinse repeat as necessary until all bubbles pop.

Posted by: Jet on May 12, 2008 at 7:55 PM | PERMALINK

Has anybody got any evidence of what the US freight industry is doing in response to higher fuel prices?

Has there been any move to bigger trucks (lower fuel cost per tonne), mode shifts from road to rail, exploration of alternative fuels (one obvious one is CNG, particularly in California)...?

I know that the 50-seater RJ market is dead, with what appears to be a big switch to turboprops underway.

Anybody got reports of any other responses, particularly ones that indicate long-term capital investment that indicates a belief that high fuel prices are here to stay?

Posted by: Robert Merkel on May 12, 2008 at 9:45 PM | PERMALINK

Double, Double, Oil in Trouble;
Prices Burn, It Ain't No Bubble.

Posted by: Erik on May 12, 2008 at 10:38 PM | PERMALINK

There were reports before the 2004 election that Bush had made a deal w/ the Saudis to lower prices just before the election, and then afterwards to allow the price to be jacked back up. And lo and behold, that is exactly what happened. Good thing we didn't elect that ol' debbil, John Kerry.

Posted by: Pocket Rocket on May 13, 2008 at 12:14 AM | PERMALINK

On this issue, Krugman is fos. Krugman does an admirable job of laying out the standard economic theory of how rising demand begets rising prices which begets rising investment to meet rising demand. But in point of fact, that is not what is happening. There is NO rising investment, as a recent inspection of Exxon-Mobil's financial statements shows (and which further confirms a study by the Baker Institute earlier this year which showed that none of the U.S. oil major are ramping up investment). Why is there no increase in investment? The interposition of speculators who are taking most of the "profits" (rather than the oil producers) would be one hypothesis that closely fits the known facts. And there's the rub: as explained here - http://atimes.com/atimes/Global_Economy/JE06Dj07.html - the Commodity Futures Modernization Act of 2000, which was written by Wall Street lawyers, exempted OTC (non-exchange) trading of energy commodities by large firms (i.e., hedge funds and the big Wall Street firms like Goldman Sachs), thereby rendering next to useless the legally mandated “Large Trader Reports” that the Commodity Futures Trading Commission previously used to spot and monitor large speculative positions.

Incredibly, Krugman and other commentators are conveniently forgetting a June 2006 US Senate Permanent Subcommittee on Investigations report, "The Role of Market Speculation in rising oil and gas prices" which concluded that "there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices". As the Asia Times Online piece notes, “As much as 60% of today's crude oil price is pure speculation driven by large trader banks and hedge funds.” But the hard data needed to really know is no longer available.

And then there are the comments last year by Saudi Oil Minister Ali al-Naimi, squarely blaming speculators for driving up oil prices. If anyone should know, thus guy should. Why don’t stories like Krugman’s provide figures on how much the increase in Saudi oil revenues actually correspond to what would be expected if the Saudis, not speculators, were capturing most of the price increase?

According to a January 2007 article in Business Week - http://www.businessweek.com/bwdaily/dnflash/content/jan2007/db20070116_499932.htm -
“The explosion in the number of financial players in the energy markets has occurred particularly in the past year or two. There are currently 530 energy hedge funds, according to Fusaro, up from just 180 in October, 2004. Of the total funds now, 177 are strictly energy commodity funds trading oil or oil futures and options, as opposed to the stocks of energy companies such as ExxonMobil (XOM) and Chevron (CVX). Larger financial institutions such as Goldman Sachs (GS) and Morgan Stanley (MS) have also stepped up their participation in the energy markets recently.”

Finally, since August of last year we have seen a collapse of some of the most bizarre and complicated financial derivatives markets. Where is all the money going that used to go into those markets? My bet is that they are going into commodities futures. And in fact, that is exactly what the president of the National Farmers Union told a panel of the Joint Economic Committee of the U.S. Congress two weeks ago. He explained how, since the financial crash began, so much speculative money has flowed into agricultural futures that grain elevators, food processors, and farmers, have been essentially squeezed out because they just don’t have the financial wherewithal to stay in play with the big Wall Street money.

I really wonder; if even people like Kevin Drum can’t come up with these facts and hypothesis, then what chance do we have of preventing Wall Street from literally starving millions to death?

Posted by: Anthony (Tony) Wikrent on May 13, 2008 at 1:05 AM | PERMALINK

Robert Merkel

WalMart has a programme under way to improve fuel economy of its delivery vehicles by 30%.

WalMart is probably the single largest freight customer in the US economy.

They are following several paths to do this:

- only ship freight if the trucks are full. WalMart has the most sophisticated computer systems in the world for freight scheduling, staffed by Phds in Physics and Operations Research

- suppliers shipping direct to the store, rather than to the WalMart distribution centres (? not sure if they are actually practising this)

- air conditioning plants at the truck stops: as much as 10% of diesel fuel usage for trucks is idling to keep air conditioning running

- new fleet of diesel-electric hybrid trucks. No manufacturer would invest in these, without a large pilot order. WalMart has made that order. Projected fuel efficiency increases are c. 30%

However trucks have lifespans of 15-20 years, so these measures will all take time.

Posted by: Valuethinker on May 13, 2008 at 5:16 AM | PERMALINK

thersites

The irony is GM and Ford make perfectly serviceable small cars in Europe. OPEL Corsa, Ford Fiesta etc.

The problem was always cost of production: at a North American price point (typically 30% below the European/UK one) they cannot make a small car and sell it profitably.

By contrast, an Explorer, which was low tech (a truck with a car body on top) was the most profitable massmarket car per unit shipped in the world.

Posted by: Valuethinker on May 13, 2008 at 5:21 AM | PERMALINK

Doc

The problem is 90% of the people in the UK live in England, but the best wind sites are in Scotland and Wales. Read nationalism as we try to build wind farms, and power lines to reach the southern UK where the demand is. The Cabinet was advised that Scottish nationalism made a really big expansion of wind power in the Highlands impossible. It can take 15 years to get a new power line built due to local objections.

Local planning objections can freeze a new wind project for 3 years or more. There are councils in England and Scotland that have a 100% rejection rate on wind farms. Many people believe they make the countryside ugly.

So we go to offshore wind, where 30GW (about 40% of total installed UK power capacity) is planned. But the economics are totally uncertain-- it's more of a hope goal. I for one wonder what happens when we get hit by these superhurricanes that we seem to have more of these days?

Whereas Germany and Spain (and the US) use a 'feed in' tariff subsidy for renewable energy (a fixed subsidy per kwhr generated) we use a 'tradable renewable Obligation Certificate'. If you don't generate the ROCs, you buy them. The result has been uncertainty which has stymied the alternative energy industry.

The government has now opted for a big push for more nuclear energy. However permission is about to be granted for a new coal plant, with no provision for sequestration of CO2.

Posted by: Valuethinker on May 13, 2008 at 5:29 AM | PERMALINK

But that's what it's going to take: change in the real world.

Agree that higher oil prices are likely to be with us in the future. However, price increases over the last 6-9 months are difficult to explain based on oil market fundamentals. E.g., from the OPEC April Monthly Oil Market Report.:

  • There is a distinct correlation between the number of non-commercial long oil futures contracts and oil prices.
  • In March, the OPEC reference basket rose 5.1% in real terms and 9.3% in nominal terms, of which 3.5% was due to the dollar's decline.
Those trends are among the reasons for OPEC deciding not to increase output at their last meeting.

Posted by: has407 on May 13, 2008 at 6:58 AM | PERMALINK

"The facts say oil is overpriced and will come down. You are free to follow the various stories if you want."

Yah, and I believe in Santa Claus and the Tooth Fairy.

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