Over the last 150 years, we’ve passed through a number of ages. The Age of Steam, the Space Age, the Disco Age, the Information Age, the Emo Age and – arguably – we’re coming to the end of the Cheap Energy Age. Maybe it’s already over, maybe it’s got a little while to go yet. It really depends how you define “cheap energy”. There probably aren’t many of us who reckon petrol is cheap at the moment, but hey, it’s still cheaper to power our cars with petrol than with other substitutes.
Anyway, this post is really just about getting some more Transport Statistics up on the site. Oil prices since 1861, as recorded in the BP Statistical Review of World Energy 2013. The graph shows two different series: “nominal” prices in blue, and “real (2011)” prices in red. Nominal prices are given in the dollars of the day. In the year 1900, for example, a barrel of oil cost USD $1.10, but of course you could buy a heckuva lot with $1.19 back then. If we try to put it into more relevant terms for us – i.e. convert it to today’s prices – we use “real” prices instead. $1.19 in 1900 had the same purchasing power as $32.71 has today, so the “real” price in 1900 was $32.71.
I’m sure I’m usually better at explaining inflation than that, so I reserve the right to come back and edit that bit!
BP’s statistics go back to 1861, which was pretty much the dawn of the modern era of crude oil. While crude had been used in small quantities for thousands of years, it started to be produced on an industrial scale from around the 1850s. Kerosene was invented, and became the most popular source of heating fluid for lamps and so on – no electricity back then, of course. Before this, the world had relied on whale oil for lighting, and whaling started to look a lot less worthwhile as crude oil (and refined products like kerosene) entered the scene.
It wasn’t until the 20th century that crude oil became important for transport. Automobiles became popular, and demand for oil grew. Production was easily able to grow with it in those days, so prices stayed low. In fact, they stayed pretty low for the first 70-odd years of the 20th century, and then
Boom. Oil shock. In 1972, the nominal price was $2.48 a barrel. In 1974, it was $11.58 a barrel. In the late ’70s, things got worse, and prices hit $36.83 in 1980 – a fifteen-fold increase on 1972 prices. The 1970s were a massive shock to the world economy, and created an era of “stagflation”: economic stagnation, coupled with rapid price inflation.
If you look at “real” prices, instead of nominal, the increase looks smaller – real prices increased by 7.5 times, rather than 15 times. The difference is because of inflation over the eight-year period. However, this hides the fact that the rise in oil prices was one of the major causes, if not the main cause, of high inflation in the 1970s.
Moving on, prices started to come down in the 1980s, and stayed low for the better part of two decades. In the last ten years, though, things done changed. You had September 11, the Iraq war, and so on. Between 2003 and 2012, oil prices quadrupled in nominal terms, and tripled in real terms. Again, oil prices were a big contributor to inflation over this period.
Which brings us up to the present day. The story continues here.
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Nice post. From what I can tell we seem to know quite a lot about the volume/costs of oil production, such that most of the volatility in recent price movements is driven by market uncertainty on the demand side. Prices halved, for example, in the post-GFC period, although demand (and prices) have subsequently stabilised around pre-GFC levels. Where to from here probably depends on whether China and the EU muddle through their respective economic issues, or whether they sink deeper into the mire of debt-fueled asset bubbles and/or public spending.
Of course the other key issue is the interaction between oil prices and exchange rates. I’m no expert, but I would have thought that a net oil importer, such as NZ, would see lower GDP as oil prices rose. As such, rising oil prices would – ceteris paribus – place downward pressure on the value of the NZD. In which case NZ seems to be at risk of an oil-price double-whammy, or more formally a “positive” feedback loop: Higher international oil prices leads to lower NZ GDP leads to lower NZD leads to higher oil prices in NZ leads to lower NZ GDP leads to lower NZD… and so on. Of course it’ll stabilise at some point, and higher oil prices might stimulate inflation and cause higher interest rates, which in turn props up the NZD. But I’m not sure that’s necessarily a good thing either …
So at the end of the day it to me that so long as 1) we’re a net oil importer and 2) our elasticity of demand for oil is relatively low, then NZ’s economy is relatively vulnerable to the vagaries of oil price movements. Interesting times ahead … :). Be interested to know what others think – I’m sure I’ve missed something.
In “normal” times, it is my understanding that the NZ dollar is positively correlated with oil prices – because we are a commodity exporter and commodity prices themselves are correlated. Although I could easily see that breaking down at some point (milk powder and oil aren’t exactly similar in a lot of ways), at which point agreed that your downward spiral could kick in.
A graph of the ratio of milk powder to oil vs time would be interesting.
A graph of how many barrels of oil you can buy per tonne of milk powder exported over time would an interesting graph to see.
yes very interesting. It is true that milk powder and oil are both commodities. Is there any evidence to sugges the correlation between agricultural and mineral commodities is weakening over time? Given Australia’s recent fiscal/economic predicament one would think mineral commodities may be down whereas agricultural commodities seem to have sustained high levels.
Stu,
My interest here is that ever since I recall, we paid for our oil imports by exporting commodities, consisting of milk powder, butter, cheese, beef, sheepmeat, wheat, whey, fish etc. Exactly what mix of commodities we sell to buy that oil changes over time (with Milk powder being a recent one) – but the fact remains they are all commodities and thus are price takers not makers.
And at times of oil price increases overseas, the amount of commodities we usually have had to sell to buy the barrels of oil always went upwards causing major balance of payments issues that treasury and generations of politicians have agonised over and used to justify why all sorts of policies are justified (or not justified) dependning on the policy and the governments point of view.
As I see it there are two parts to this issue in a NZ context:
1. What we can get for our exports in NZ Dollars
2. What we have to pay for our oil imports in NZ Dollars
Those charts you link to are recent and cover generic US based indexes, not NZ specific ones, and what I am thinking about is the kinds of stats you used to find in the NZ Year Book as these always brought the numbers back a NZ context.
So do we have any such charts that you are know of?
I’m having a dig for these kinds of stats at the moment. It’s a bit hard to find BoP and oil imports data going back to before the 70s oil shocks, but I’m doing my best.
P.s. Just found this for agricultural commodities: http://www.indexmundi.com/commodities/?commodity=agricultural-raw-materials-price-index&months=60
And this for crude oil: http://www.indexmundi.com/commodities/?commodity=petroleum-price-index&months=60
Both generally show a recovery from GFC, although agricultural index is now higher than it was previously, whereas oil index is still lower. Same for metals, incidentally: http://www.indexmundi.com/commodities/?commodity=metals-price-index&months=60
Not sure how credible any of these indices are mind you.
You can see there why Think Big crashed and burned so badly in the ’80s – most of those projects required oil to be above $USD40 a barrel in real terms to pay for themselves.
A number which was never sustained in reality past Muldoons term as PM, and then not seen (or sustained) again until Post 9/11 when its headed above that figure in real terms and stayed there.
You can see there though why Muldoon thought 1980’s carless days were a sensible way to save the country spending too much on oil when it was over $100 a barrel in real terms.
Not that it actually worked in practice to save the countries “balance of payments”.
But even now our transport planners seem stuck in the era “pre-70’s oil shock” when oil was cheap, always had been, and as far as they were concerned always would be, giving cars the golden, anointed status – all the while the real terms oil price chart heads towards the heavens…
From memory, the carless days policy was evaluated as not being very successful… but it still seems like a much more effective response than what they did in the US, which said you could only fill up your car on alternate days. This would only really have an effect if you used more than half a tank a day!
There’s a whole lot in that one graph. Note the steady and constant decline in real fuel prices all through the post war heartland years of sprawl and motordom in the US and the rest of the west [esp Canada, NZ and Aus], 1946-71, also the formative years of the baby-boomer generation. Those people who ‘just know’ that ‘everyone’ prefers to always drive and live in a distant detached house. A lifestyle and ideology dependent on a liquid fuels glut. What stopped that decline in prices was the peak in US production in 1970, which precipitated the 70s ‘oil crisis’. To which the central parts of Think Big was a rational response. A response that was undone by the next big change in oil supply.
This was the three new OCED production zones [North Sea, Alaska, Mexico] that came online in the 1980s [and saved Thatcher’s arse] raised supply [supply owned by the west!] and lowered prices back down [USD 10! 1998], broke OPEC’s ability to influence price and set the tone for the rest of the century. Because each of these zones were/are run by net importing nations at the time all have been run as hard and as fast as possible and all three of these fields are now firmly in decline. North Sea peaking in 1999 for example, so then, this century oil returned to inexorable rise as production rate [which is the metric that matters; not reserves] has been tested ever since by global demand. A new global demand from developing and oil producing countries rather than the previously dominant source of demand; the West.
As this new shift in the supply/demand balance became apparent three main types of predictions became widespread:
1. Doom: global financial collapse as the western economy in particular is dependent on affordable liquid fuels to grow even modestly
2. Cornucopia: new technology and new fields will be opened up especially because of the new higher price making such things that were previously uneconomic now viable; Technolphilia and Business as Usual.
3. Energy Transition: A version on the above, were the new oil price makes renewables now viable and we finally see a move away from FF dependence at scale.
So far, who was right?
None, or rather I prefer to say; all of the above, in a mix that still is yet to have, and may not ever have, a dominant conclusion:
1.The Doomers were right, there has been and still remains a profound shock to the western economy, and the doomers were wrong as the ship is still sailing, although not as before, especially in Europe.
2. The ‘don’t worry, look at last time, we’ll find more or invent a substitute’ can point to the application of expensive recovery technologies that have opened up a new resource in North America: Tight Oil, and Tar Sands production turning US and Canadian economies around, along with lowered demand. But this is still not enough to significantly lower the global price because this production and demand destruction has been balanced by even more demand from the developing world. And these techniques need high prices to even just break even.
3. The New Agers have also been right in the electricity generation area especially in some places [Germany, but also Australia] but also in fact globally, where renewables are the fastest growing sources of new generation, but off a very low base.
However you can say that in different places one or other of those themes does dominate.
Interesting Times, the oil story is not, by any measure, yet written. Fascinating.
I’ve found the prognostications of people such as John Michael Greer and Ran Prieur to be the most prescient. They don’t expect a fast collapse but a gradual decline punctuated by step changes as EROI reduces and the battle between net energy per capita and efficiency plays out. They may yet be too pessimistic though, a technological breakthrough or even mass uptake of PT use and cycling coud bring back the buffer that would ease prices.
The question then becomes what proportion of liquid fuels production is still viable at lower prices, and the extent to which Jevon’s Paradox comes into play.
Of course, but we could all use a lot less without that much of a lifestyle change, the US has dropped 2m barrels a day in demand since oil hit 100, with a whole lot more of that, life on the ‘bumpy plateau’ could stretch on for quite a while…. and give more time for transitions of various kinds.
Greer is clearly right; we are witnessing the end of a period, the beginning of a new one, but how long this takes and what is lost and what is gained is not so clear.
I’m not without optimisism, esp for NZ, but we really do need to pull finger and start making decisions based on the facts on the ground [and under it].
In the late 70’s I can clearly recall the second oil shock gave the government of the day a hell of a fright, (because it proved the first was no accident), so much so it led to the infamous carless days, search for alternative fuels and Think Big. Muldoon, I reckon thought the writing was on the wall for our economy with ever climbing oil prices (if we did nothing) and that was without the huge demand from China and India but to name a few fast growing economies. He was right but he couldn’t see what was around the corner as has been said, Alaska, North Sea etc. But that only put off the inevitable and the mid 2000’s reality set in again.
Which is why I cannot understand this governments obsession with roads like its the 1950’s. They claim to be economically smart but this proves they are not. I can only assume they are not that dumb and so therefore some very generous donors related to the road industry have had a hand in this policy stupidity.
If they are hoping another North Sea oil field is about to pop up they are living in cuckoo-land as the chances are next to zero. And therefore we are stuffed if we keep heading down the insane roads roads roads direction!
Even if we have a North Sea Oil field off our coast, we will still end up paying “world prices” for it, so its no panacea either way.
The North Sea is shallow. The depths that Petrobras bailed out of the search for hydrocarbons off the East Coast make anything but a crazy huge find almost certainly uneconomic, even that would be very risky, and we would probably end up giving everything away in order to persuade an oil co to even try to extract it. Everything meaning pretty much all royalties and environmental and safety oversight and caution. All we’ed end up with is a further cooked atmos and the final nail in our clean-green brand coffin.
It seems that the “North Sea” oil field has been found somewhere off the coast of Brazil and that is probably one of the reasons that we are trying to cosy up to them. It’s unfortunate that they don’t seem to give a toss for us.
Taka-ite, no Brazilian ultra deep water is not capable of having anything like the global supply impact like those three 80s fields. Nor is Shale despite the hype from the US, in fact the Shale resource, although not meaningless at all has done less to lower imports to the US than the fall in domestic demand over the same period. Together; new sources of unconventional oil and demand destruction have made a profound and positive impact on the US economy. But the point remains that by far the most valuable oil to your economy is the stuff you don’t need to buy or produce.
Without even raising the issue of climate change or the other negative externalities of oil dependency we ought to be doing all we can with urgency to reduce our economy’s need for this stuff for prosperity’s sake.
Of course the orthodox view of Think Big is that it failed because it was government trying to shape industry, not because the global supply context changed. But I am not proposing TB II, just that we should be picking all the low hanging fruit in this orchard; in particular we need to stop subsidising the driving culture, especially in our cities, and especially in our one city of scale.
completely agree. For prosperity’s sake let’s stop subsidising oil imports. Minimum parking requirements and RoNs I’m looking at you …
Oil vs Milk Powder..really??? There is a correlation between the USD and Brent/WTI quotes. This is on the premise that as oil is priced in dollars any movement in the forex will be offset in crude value. To a point this happens but not because of any fundamental relationship but simply because the hedge funds believe this to be the case and keep betting on that spread. If you could somehow regulate speculation out of the oil markets (Im not sure that is a good thing) then you would find a crude v USD disconect. Certainly there is absolutly no way that NZ’s milk production in any way has an influence on world oil prices. In fact NZ could sink below the ocean (Im sure thats a very bad thing) and the oil markets wouldnt blink.
Oil spiked in the 70’s for two reasons. War in the middle east which effected shipping through suez and the Shar of Iran formed a nice little cartel called Opec. The next oil spike was due to the Gulf war and then a momentum ramping of price from 2005 onwards based on exponential Asian demand.
Speculators got wise very quickly that the lows of $9/bbl of the 90’s wouldnt last and thanks to the nature of how you can invest in futures. (You pay an initial margin and then only pay again if your bet goes wrong) a long sustained bull run on crude futures pushed prices to almost $150/bbl by 2007.
The GFC reversed that position only because many of the investors were forced to cash up positions to create cash flow. As soon as the Fed handed out Tarp funds the same invested started to US US tax payers money to go long crude futures (The joy of being an oil trader) and the prices recovered to todays +100/bbl values.
The oil producing nations are happy to be getting $100 a barrel. The G20 are happy to pay $100/bbl. When the markets move to far above or below that magic strike price you see intervention to protect every ones interests. As a rule of thumb (and I invite any of you to check this) you would make a lot of money buying brent futures at $100 and selling them at $105. Unless there is a game changer these values are pretty safe for now.
NZ has always been at risk of high import costs of which oil is one of the major import commodities. A high Kiwi dollar helps the motorist but as NZ is an Exporting nation we need a Low Kiwi dollar for our industry and framing to survive. Frankly Id urge our Government to be investing in things like hydrogen powered transport fuels. If we cracked that technology not only would we be immune from higher oil costs, we could devalue the Kiwi to boost exports and create employment. We would also be able to export the technology and make a bloody fortune. We could be the new Arabs….anyone fancy a gold Lamborghini?
But what’s the competitive advantage that makes NZ more likely to figure out hydrogen fuels than any other country in the world? Unfortunately, we don’t have a good science base here.
There wasn’t a suggestion of a correlation, just that milk powder price can proxy for the value of what we as a country produce- if we don’t have oil, but we sell something more valuable, then no biggie to buy oil.
If only.
FF are an input into agriculture at every level, so we can’t expect to shrug off rising oil prices by just making and shifting more primary produce… that just means having to buy more oil… unless we can decouple our output more from this input.
Although we do run the farms, forests, and fisheries on a whole lot less than we waste driving around in circles in our badly planned and serviced cities.
That’s what needs urgent action. So, hence, this whole website!
See here for proportions of fuel extracted here, imported, and how it is used: http://greaterakl.wpengine.com/2012/08/28/oil-strike/
Phil I think you need to read other people’s comments more carefully. More specifically, previous commentators did not suggest a causal relationship between oil and milk powder, merely that – as two commodities – they tended to be (weakly) positively correlated. Some other people speculated that the correlation between the two may be weakening over time, which is the issue in question.
Also, few previous commentators called for government investment of any form, as you seem to be doing now with regard to HFCs. Instead they (Patrick et al) called for the removal of policies subsidising private vehicle ownership, such as minimum parking requirements (as per today’s post: http://greaterakl.wpengine.com/2013/07/16/the-death-of-parking-minimums/).
‘The G20 are happy to pay $100/bbl’
This is totally untrue, given that you live in the UK phil you cannot have missed what is happening to the economies of Europe and Britain, and energy poverty is a huge factor in this.
The rising economies of SE Asia, China, and the stronger Latin American ones are more able to afford USD100+ oil. The US is adjusting to it with conservation and Tight oil and Canada and Russia are net exporters. Japan is in a whole lot of trouble with no native hydrocarbon supply and like the UK, a crumbling nuclear asset that needs multiple billions just to close. Uk is now a net oil importer and can not live like it has since the 1980s having pissed away the North Sea resource cheaply.
Parts of G20 is on the rack over USD100+ oil. We are on borrowed time.
NZ hasn’t the time or the industry to break through with new and unproven technologies, but we are rich in electricity generation. We also have gas that we waste making more electricity. Clearly we need to convert transport where possible to electric power and conserve the gas for the parts of the transport sector for which that is impractical….
What? Phil lives in the UK?
New Zealand inflation fell to just below expectations in the second quarter, as cheap imported petrol helped counter rising housing related prices, pushing the annual rate to a 14-year low.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10898808
Yup, and then we went from June into July (third quarter), and the price of petrol went from $2.16 to $2.27. Petrol prices are quite volatile and they do tend to have a big impact on those inflation figures, whether it’s upwards or downwards.