And, just as an economy may stagnate when labor costs grow too high, so too can an economy plunge into recession when energy costs grow too high.

Respectfully, Ace, this is simply untrue.

Recessions are caused by a contraction of the money supply, which is the direct consequence of a prior artificial expansion of the money supply.

Only a manipulation of money itself can cause a recession.

Likewise, high labor costs cannot cause a recession. Artificially increased labor prices (i.e., wages) can cause unemployment, but not a recession.

If the price of anything is left to free market adjustments, the economy as a whole adjusts. Always. Always always always. It's as much of a certainty as the proposition that force is the product of mass and acceleration.

but [changing fuels] will not be cheap

It will cost no more than the price of oil, whatever it is. Otherwise, we'd just stick with the oil.

The number I'm coming up with for a break even with shale oil is between $40 - $50. Apparently, companies got so burnt last time they went to shale oil in the 70's that they are hesitating to crank up production now. The oil producers are taking a wait-and-see attitude that tells me they think this price spike may not last as long as everyone else seems to think.

Companies up in the Athabasca region in Canada are getting oil out of oil sands for about $13 to $20 a barrel right now (selling at $45 last I checked), and all it would take to exploit the massive deposits up there would be capital investment and a couple of years of time.

Between oil and and oil shale, there's an incredible amount of fairly easy to access oil in North America alone, and the only reason nobody's been digging it up was that "normal" oil deposits were cheaper to access.

Heck, when the price stays at $60+ per barrel, there are a lot of plain old oil deposits in the US that become profitable to explore again, like many in Texas and Louisiana. When oil dropped in price the last time, they just capped a lot of working wells because it was cheaper to buy it from overseas than to go through the paperwork here. When oil hits $80/bbl, someone's going to get around to drilling in the lower 48 again.

I suspect the crossover point is well under $100/bbl - probably in the range of $75-80/bbl.

That means the pain threshold isn't going to be dramatically higher than today's. Maybe 20% higher, but certainly not 2X/3X.

The technology transition period also gets blunted some by presently uneconomical wells coming back online as prices increase. This effect is happening already.

At $20/bbl, someone sitting on domestic fields wouldn't bother pumping. At $60, all of a sudden their interest perks up.

It needs to be noted also that it is NOT in the oil producing countries best interest to allow prices to get so high that this technology changeover occurs any time soon. If the point is $75-80 range as I suspect, then we've seen the worst of it already. It can't get much worse or they'll be slitting their own throats.

Brass makes a good point. What counts is not the current spot price for oil, but what people think the future lowest price will be. If that's less than what you need to make back your $5 billion capital investment, no one's going to bet $5 billion.

The way prices have bounced around the last few decades, would you bet $5 billion that they won't drop below, say, $40/bbl?

Phinn:

You sound very intelligent, but oil prices can absolutely cause a recession. Ace is right on.

A recession is defined by most economists as at least two consecutive quarters of decline in a country's Gross Domestic Product.

We are a consumer-based economy. When oil prices jump like they are consumers have less money to spend in other sectors.

This leads to a significant decline in total output, income, and employment. Thus, GDP declines, and when that happens for consecutive sectors you have a recession.

When you say that "Only a manipulation of money itself can cause a recession", you sound erudite, but I think it fails to explain all the several factors that can lead to a recession.

When oil hits $80/bbl, someone's going to get around to drilling in the lower 48 again.

Anonymous, it won't even take drilling - as you point out, there are a lot of capped wells in the lower 48 - not just in TX and LA, but also KY, TN, AL, etc. All it will take is to get those wells pumping again, and that doesn't cost much.

You can't say what the "costs" of changing from oil to some other form of energy/transportation will be. It's impossible.

What was the "cost" of building the federal interstate highway system?

There's the cost of actual road construction and maintenance; then there's the cost of re-building of all our cities (astronomical); the cost of all the time everyone spends driving to the big box retailers instead of the neighborhood store; the cost of building all the cars; the cost of maintaining, repairing and insuring them; the cost of the 35,000-plus annual deaths; the cost of the lawyers to litigate the fault of all those collisions; the cost of educating those lawyers; the cost of their full-page telephone book ads and their billboards; the cost of the orthopedists and chiropracters, and their training and equipment; and, of course, the cost of all that gasoline.

It's impossible to pinpoint the cost of a change as drastic as changing from energy source. Such a change is systemic. One change effects everything else. That's what economic means. You can't possibly predict, much less account for, all of the changes that would be entailed.

Instead, all we have to go on is the price system. The price contains all the information you need to know. Is A more affordable than B?

Prices are signals. They tell Joe Consumer which car to buy, and they tell JimBob Texas Rancher when to uncap his well and start pumping.

Its not in the oil producer's best interests to drive the US into recession.

Why would they do that? When the US is in recession, the whole world is in recession.

We are a consumer-based economy.

All economies are consumer-based. All production is coupled with consumption. There is no other form of economic activity.

When oil prices jump like they are consumers have less money to spend in other sectors.

As the anonymous poster pointed out, at least part of the increase in price ends up going toward domestic oil production. That is immediate. Trust me, I'm from Texas. I know from personal experience that many oil producers watch the price of oil very closely, and it has a direct and immediate impact on the scope of their business operations. Rising prices mean growing companies; falling prices mean layoffs.

Any time the price of anything rises, that means that something else gets less. Housing prices, for example, have climbed much faster than oil prices, by far.

You can't examine the economic effect of a price increase in oil in isolation. That's the fundamental lesson of economics -- everything is connected. Even on a short time-scale, the money for the higher gas prices goes somewhere. Maybe it's to someone you dislike, but that person now has more money to spend, perhaps on capital expenditures to, for example, increase efficiency of exploration.

If the profit margin in that line of business is so high, it means that people will move into that sector to take advantage of it, and the price will fall. This will always happen if the market is free.

not to beat on Missive, and hate to be brief, but consumer direct purchase of oil product is not going to cause a recession. It makes great headlines and great watercooler bullshit because everyone experiences it and it is the most obvious effect of increasing oil prices.

It is in production that higher energy costs strain the system, particularly in cap goods. Basic materials producers are able to leverage some of that off on their customers, but the cap goods guys are pretty much screwed (imagine if GM said, "energy cost us alot this year, so a Lumina is going to cost 20% more than it did last year, or will likely next year". Yeah, right).

Energy is not nearly the topline expense that it was in years past, but it does have the effect of putting a weight on the shoulders of the economy. What's notable is that even with this higher-than average weight, the economy continues to move forward and even expand.

I don't need oil to fall to $20 a barrel. I would like $45. Every pound that comes off the economy's back falls right to the bottom line.

So in short, stop telling Phinn he's trying to sound smart but isn't. Or at least if you're saying it, have the sack to come out and SAY it.

And being right yourself would probably help too.

Andy the Squirrel

If any gov't actually cared about the price at the pump they would:

1) Slash gas taxes

2) Pass legislation making it easier (or at least possible) to build new refineries.

One problem with refineries is that the places that need tons of oil (big coastal cities) are also filled with lots of liberal NIMBYs (and their SUVs) - sure you couls probably get approval to build a refinery in the Arizona desert, but it is too far from the coast for both input and output. Which is why refineries tend to be on the coast, which coasts are now getting crowded and expensive.

Phinn said:

"All economies are consumer-based. All production is coupled with consumption. There is no other form of economic activity. "

Thank you Phinn.

Although I hardly needed you to tell me that. The reason I used the term "consumer-based" was to lead into my point about high oil prices hurting consumption. Many writers use the term "consumer-based economy", including respected economists.

Then Phinn said:

"You can't examine the economic effect of a price increase in oil in isolation. That's the fundamental lesson of economics -- everything is connected. "

Once again, thank you.

Although the WHOLE POINT of my post was to suggest how high oil prices will hurt our economy because "everything is connected". Consumers in our "consumer-based economy" will have less money to spend on other products.

Wal-Mart, for example, is already saying high oil prices will cut into their profits.

I am not predicting that this current surge in oil prices will drive us into a recession, I am only saying such a thing is in theory possible.

I, for one, see oil around $40 a barrel in a few months.

Hey Squirrel:

I am right and I don't need you to validate me.

Also, I said in the beginning of my original post that I thought Phinn sounded intelligent.

So stop trying to pick a fight with me.

Ace you remind me of someone--JIMMY CARTER. Let the free market work and I assure you that the price of fuel will be the lowest it can possibly be. Let the Government do it and I assure you we will either have shortages and long gas lines or we will have very high taxes and high gas prices. What happened to you buddy? Didin't you used to be a conservative?

there is an upper limit to the cost of crude oil -- at some price-point, yes, it will become as costly as producing oil from shale or coal.

I don't know what that price is either, but I'd bet my balls that the Saudis will make sure that we never quite reach it for as long as they can. Free and competitive markets always produce the best products at the lowest cost, but in order to have the benefits of competition, you must have competition! The global supplier market is in the hands of a cartel called OPEC whose (argue as one might about their efficacy) purpose is to keep the price of oil as high as they can. And the disasterous results from rising oil prices will take a very, very long time to undo before alternative sources are in place. THE ACE OF SPADES will be an old, balding, paunchy, dirty old man, er... well, older, balder, more paunchy, dirtier old man than he is now, before it ever happens.

there is an upper limit to the cost of crude oil -- at some price-point, yes, it will become as costly as producing oil from shale or coal.

What Me Worry?

I'm all for high oil prices. Inflation? Hell, I've always wanted to smoke a $500 cigar, live in a ten million house and drive a $150,000 car!

"If this is true, though-- then it seems that the government ought to guarantee the success of companies producing this sort of oil, promising them, for example, that they will purchase all excess product for at least cost plus 10%..."

Jimmy Carter! After all these years! I thought we ran yer ass out of office in 1980.

I'm a chemist, not an economist, nor in any other way pundity, but the place I got my PhD has a Center for Applied Energy Research. I found a relevant (if a little old) report about their work on coal liquifaction. http://www.caer.uky.edu/energeia/PDF/vol8-3.pdf

It touches some on the economics of this process, as well as a tiny bit of the chemistry and technology. It's pretty interesting, but I have more or less ignored this area of chemistry since school. I recall an undergrad prof who had worked at Exxon on cracking catalysts saying that the petroleum industry actually has a lot of the synthetic fuels technology worked out, ready to pull out when the price is right, but I dunno when that would be.

Dave,

The Germans worked out all the basics over 50 years ago, and even produced a modest amount of synfuels during the war (before we so thoughtlessly bombed those plants into rubble).

I'm sure there's been some fine tuning since then, but the processes are very well understood.

The good news is that the Germans built their plants in a relatively short time and under less than ideal wartime conditions.

Our greatest handicap in duplicating that work will be the NIMBY factor. Even that will subside some if the moonbats spend a winter or two freezing their butts off because they have to make a choice between eating and heating.

I was the anonymous poster early in the thread, mentioned in the post (hit the button too fast after a refresh, and lost my info).

Here's one cite for the oil sand extraction price:
http://www.mining-technology.com/projects/syncrude/

They mention a "per barrel" cost of $14 per, which makes sense for $45+ a barrel wholesale prices.

I agree with Rocketeer about uncapping older wells, but that would actually need a change in US law, I think. It used to be the case where capped wells couldn't be reopened without special permission, and doing that for thousands of old wells could be a pain without some changes in the statutes.

This will also be a good test of Thomas Gold's abiogenic theories, since some of those old wells have been sitting fallow for long enough for the reservoirs below to refill (as some in Louisiana have supposedly been doing).

Of course, when gas prices get a bit higher, one way to get a lot more "effective" oil is to get tuneups for *all* cars (it would supposedly give us the equivalent of ten percent more gasoline, which is currently wasted by out of tune motors).

The South Africal company SASOL was (and may still be) a big producer of oild from coal. The problem is, it's energy intensive (like tar sands and shale extraction). The solution, of course is nuc-u-lar power. There is actually serious discussion about a nuke power plant in northern Alberta to power expanded oil sands extraction.

the government ought to guarantee the success of companies producing this sort of oil ...

Jiminy Christmas! What the hell happened to Ace? Where have you taken him, Jacques? Ou est-ce que le vrai Ace du Spades?

Seriously, if there were an alternative source of petroleum that needed only a $40 bbl price point to be profitable, I could line up some financing for you, tout fucking suite. Would seven or eight hundred million be enough to get you started? If that seed money pans out, there's more where that came from.

No "government guarantees" required.

"Seriously, if there were an alternative source of petroleum that needed only a $40 bbl price point to be profitable, I could line up some financing for you, tout fucking suite. Would seven or eight hundred million be enough to get you started?"

Actually, not really.

The oil sands extraction setup mentioned above cost a couple of billion bucks to get going, and for full-scale production at the level we'd need for replacement of "normal" oil sources, would take *trillions* in the long run.

Sounds like a lot, doesn't it? Well, it is, until you realize how much money people are spending on oil exploration already. They're spending tens of billions of dollars to get oil out of the ground in places like Saudi Arabia and Iraq, and you have to make a serious effort to drill a hole and not hit oil over there.

Oil well drilling is really, really expensive. A single well costs anywhere from $150,000 to $1 million a shot, with no guarantees of success. We also have the minor issue of having to train a whole lot of new drill hands to run a major exploration/redrilling effort.

the government ought to guarantee the success of companies producing this sort of oil ...

Ace you remind me of someone--JIMMY CARTER.

Yeah, I winced to when Ace proposed massive government intervention in energy markets to encourage production from shale. Programs like that are always a disaster. Let the market work.

Correction: Apparently, the proper way to say it is: Ou est le vrai Ace des Spades?

Just wanna be sure you understand me, Frenchie.

As for the offer for $800 million, there's a common practice in finance -- the installment plan. Very rarely does one need all of it up front. When you say needing trillions in the "long run," just how "long" are we talking?

"Very rarely does one need all of it up front."

Indeed...

Slightly OT, but has anyone noticed Google wanting to do another stock offering when they're already sitting on something like $2.5B in cash?

Something about that is reeking...it sounds to me like Google wants to basically just float investor's cash.

I'm with you, Tony. Who's underwriting the IPO? Have they ever heard of due diligence? Plus, they keep doing it for oddball amounts (dollar amounts corresponding to the numbers pi and e.)

I heard at one point that Google was planning to sell some sort of combination CPU/internet connection for an ultra-cheap price (like $10 per unit), with the idea that it created some sort of priority routing toward favored websites.

But that was years ago, and so far nothing. Nothing but stock offerings, that is.

They want to buy mu.nu, and I told them I wasn't interested in a stock swap.

Tony, The German Formula mythology is just that. Mythology. There was nothing mysterious about what they were doing. It was simply necessity to produce fuel for their war machine. That fuel was outrageously expensive compared to natural petroleum derived fuels but being on an all or nothing war footing makes many outrageous things acceptable. If the Nazi's had ever secured any major oil fields their synthetic fuel production would have ended very quickly.

By no small coincidence, I heard mentioned on the radio today that China and India have taken a big interest in placing investment in Canadian extraction plants.

TONY--- I've been a stock broker for more decades than i care to remember and my take on google's stock offering is that maybe they have an ENRON accounting problem. Did you ever hear of a company that made money hands over fists needing MORE money? Doesn't make sense, IF they're really making all that money. Besides, they just got a bucket full of money with their original IPO.

Missive-

Nobody has validated anything you've said.

You've got a big mouth and a bigger persecution complex. Next time, bring some dynamite if you're going to shoot your mouth off. You aren't making much of an impact here, except to take what others said about your first post and say, "OF COURSE THAT'S WHAT I MEANT! IT GOES WITHOUT SAYING! THANK YOU FOR VALIDATING ME!"

Thanks

ATS

Daily Missive:

I understand your concern, but let me point you to an article that addresses this very point. It's here.

As the author says:

From an economic point of view, higher oil — and oil product — prices are not a problem. They convey useful information about the perceived scarcity of the resource. Owners of oil fields and other oil assets get rents, but this is simply a transfer with no special economic significance.

To summarize, oil prices have recently increased because of supply disruptions, and because market participants believe that the resource is becoming scarcer. Crude oil could be scarcer in the future for a number of reasons: the political situation in the Middle East and the cost of developing new supplies (like oil sands), on the supply side; increases in demand, caused by Chinese and Indian growth, on the demand side.

In other words, the increase in oil and gas prices cannot cause a recession. They inform the market about the economic conditions, and it will act accordingly. Higher energy prices give the economic signal to the entire world to become more efficient at energy use. The costs associated with implementing that efficiency, whatever form it takes, suddenly become economically justified.

If it were not for these all-important signals, and consumption were to continue at current levels, the price-fluctuation that would eventually come would be 1000 times worse.

In other words, if the price did not increase according to market conditions, people would continue to consume at current levels. When the scarcity became acute, the price would skyrocket, and the changes in consumption and production patterns would have to be made on a much shorter time scale. This could be very bad.

Prices must remain free from artificial interference (in the form of controls, subsidies, protective tarifffs, etc.) in order for this corrective, adaptive mechanism to function properly.

Did you ever hear of a company that made money hands over fists needing MORE money? Doesn't make sense, IF they're really making all that money.

They've smartened up this time - after the recent successful prosecutions, now they know they're going to have to steal enough to buy (or at least rent) some judges as well as pad their "retirement funds".

I'm going to be opening up a chain of Rent-A-Judge™ stores to cash in on this.