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The Long Recession

Sometimes people ask me what I think will happen as a result of peak oil. Well, it depends. We could see alternatives – natural gas, ethanol, GTL, CTL, etc. – fill the gap of falling oil supplies for a while. It just depends on how quickly production falls. But if the alternatives are not up to the task, then I think what we will see – borrowing terminology from The Long Emergency– is The Long Recession. Here’s how it would work.

As economies heat up, demand for oil increases. This puts upward pressure on oil prices, which can ultimately cause a recession such as the one we are in now. Historically, spiking oil prices tend to consume disposable income and lead to recessions. Jeff Rubin, whose new book I recently reviewed, has claimed that four of the past five recessions were caused by spiking oil prices.

In normal cycles, oil companies build up capacity when oil prices are high. A recession caused by high oil prices, combined with overcapacity built up during the price rise, can keep oil prices at bay for a long time. But what if oil capacity can’t be overbuilt, because oil production has peaked? In this situation, oil prices will start to recover just as soon as the economy starts to come out of recession. This may in turn “restall” the economy, leading to a long recession that just repeats the cycle every time the economy begins to recover.

It is hard to say that we are at that point. However, oil prices have recovered quite a bit of lost ground, and have now crossed $70/bbl:

$70 oil menaces budding recovery

At the end of May CNNMoney.com ran a story asking if $60 oil will kill any economic recovery. ‘No,” most analysts said – consumers could shoulder $60 crude, and analysts didn’t see prices going much higher.

Now oil is touching $70 a barrel. Goldman Sachs recently said it sees crude at $85 by the year’s end. With the economy still on life support, oil is drifting dangerously close to being the wet blanket at the recovery’s party.

Hmm. Sounds like what could be waiting on the other side of this recession is…a recession.

There are alternatives that start to become economical with oil at $70 or more. Oil sands, for one. Natural gas vehicles also start to look pretty good at those oil prices. Even GTL, CTL, and BTL stand a chance of being economical if oil prices hang around at lofty levels. But companies – especially oil companies – are pretty risk averse when it comes to predicting oil prices. I doubt any U.S. oil companies are basing future economics on the expectation of > $70 oil. If they were, you would see far greater investments into unconventional energy sources.

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June 9, 2009 - Posted by | btl, CTL, economics, gtl, oil prices, recession

20 Comments

  1. The Long Recession is one scenario — but there are many others.Key point is that the supply of oil for the near term is driven by political decisions made by human beings, not by geology. A sudden outbreak of common sense in Venezuela, Iran & Iraq could deliver a substantial increase in supply, and doom the Long Recession scenario. Goodness, a sudden outbreak of common sense in the Obama administration could result in increased production in the US.But suppose the Long Recession/Tight Supply-Demand balance comes into play — remember that the money sent to oil exporters gets recycled into the global economy. Given the number of Cadillacs on the streets of Kuwait, the Kuwaitis might decide to use any extra money to buy Government Motors and build up the export capacity. The Tight Supply-Demand scenario would create winners & losers, but might have less impact overall than one might think.The other factor never to forget is the high price that European consumers have been paying at the pump for years (equivalent to $250+ per barrel). And yet life goes on — the motorways are packed, the airports are full of jets taking pasty white northern Europeans to warmer southern destinations, where they sit on the beach & worry about alleged Anthropogenic Global Warming.The availablity of oil is probably more important than the price.

    Comment by Kinuachdrach | June 10, 2009

  2. The Europeans don't have to fill up their gas tanks, and then go home and write a check for health insurance. Their health insurance premium is, in a manner of speaking, included in their cost of fuel.I'm starting to fear the ten-year (off-and-on) recession. Maybe, more "on," than "off."It looks like around $3.50 is where the economy really starts "feeling it." In a weakened state like the economy is in now the number might be a little bit lower. We "could be" in for a pretty crappy slog.

    Comment by rufus | June 10, 2009

  3. "I doubt any U.S. oil companies are basing future economics on the expectation of > $70 oil."If I ran an oil company these days I would run scenarios at $25, $75, $125, $175, and…$250. The base case may be $50 for costs – but you would have to mad not to plan for volatility.

    Comment by Anonymous | June 10, 2009

  4. CNN recently showed crude oil price graphs which preceeded the last four recessions. Then they showed the $147/bbl crude price just before the last oil price collapse as this current recession was gathering momentum. Comparing these graphs, it was amazing to see where the $147 price was in comparison to other similar sets of circumstances where high oil prices were the direct cause of recessions…My gasoline tonight was $2.67. The pickup had 3/4's of a full tank and I topped it off. I then filled two five gallon jerry cans of gasoline and the bill was over $58.I can remember gasoline in the late 1960's averaging 25¢. And when supplies grew large inventories, short-term gas wars would erupt and extra supplies would quickly be sold at 21¢ — even as low as 19¢ one time back in 1869 with the Viet Nam war raging too.Tobacco then was 25¢ a pack for cigs. Now it is $5. I checked groceries at the supermarket this same year and earned $1.82 per hour before taxes and union dues were withdrawn.Cliff

    Comment by Anonymous | June 10, 2009

  5. Hi Cliff – remember the same time period & I also worked at a grocery store the summer of 62 as a box boy.Earned minimum wage of 1.25 per hour and was forced to pay union dues. Haven't liked them since!In Oregon cigarettes were 1.89 a carton and gas was normally about 25 cents – 16 cents for farm gas (no tax) with the gas wars.The cost of oil right now has to do with the dollar being 1.4 to the euro – in 98 it was 0.83 – that is about 60% the value. Meaning right now europe has 36 USD per barrel oil.

    Comment by Russ | June 10, 2009

  6. Higher oil prices are what Chavez needs to survive. I just saw a story that OPEC won't raise production until oil gets back to $100.

    Comment by Anonymous | June 10, 2009

  7. Well, Kinuachdrach stole a lot of my thunder. The quote Kinu, "Politics Trumps Geology." There is gobs of oil. There is even heavy oil deposits in the Mideast no one has ever bothered with, as there is so much light stuff. Venezuela. Iran. Iraq. Nigeria. Libya. A roll call of lunatics. Still, even with thug states controlling oil, the threat ahead is glut. We are glutted now, and demand likely will not recover for years. If we have an L-shaped recovery, I suspect crude oil demand will never recover.Now some exciting news!A real fact: At the corner of La Cienega and Pico Blvd, in Los Angeles, yesterday I pulled up to a gas pump…and next to it was a newly installed CNG pump! "3600 PSI" it said! As far as I know, it was installed without fanfare. I drive by the station on my way to work. It was an ordinary size pump. and there appeared to be no excavation associated with its installation.Unless it is a movie prop (and this is Los Angeles) all this says to me that CNG can be installed in ordinary gas stations rather easily. You can even have your own gas station at home. In the USA we are recently blessed to have discovered shale gas. Whoever commercialized shale gas extraction deserves the Nobel Prize, and several other medals in succession. We now have a 120-year supply–and we just started finding the stuff.Converting even existing cars to CNG is doable. Evidently, converting gas stations to CNG stations is doable.So, where is the doom? Why won't the US actually have a boom, as our dollars go into Louisiana instead of offshore? I say, "No Doom, Maybe Boom"

    Comment by benny "reargas" cole | June 10, 2009

  8. Rather I say, "Boom, No Doom." That pithier.

    Comment by benny "Boom, No Doom" Cole | June 10, 2009

  9. Benny, why don't you do a little research on this, and come back and tell us about it. I know I don't know much about using CNG in cars. I doubt if very many people do. How much does it cost to convert a car? What ARE the per mile costs? What are the losses in HP? What about engine life? What DOES it cost to add a CNG pump to a fuel station? How many CNG models ARE Honda selling? Are they making money? Or is it a "Loss-leader?"If nat gas prices really were to stay around the $4.00 level maybe it's something we've got to look at. Can Nat Gas prices Really stay around the $4.00 level in the long run? Enquiring minds want to know.

    Comment by rufus | June 10, 2009

  10. Most gasoline demand is optional. We guzzle it down because it is cheaper than soda pop. When oil gets to $200, people will have to ride the bus. Boo hoo hoo.

    Comment by robert | June 10, 2009

  11. Benny.Interesting to hear about CNG pump. Sounds like you are in West LA. I used to live in Santa Monica just off Wilshire. My son lives in Glendale. What next ? CNG surfboards ? (just kidding)John

    Comment by Anonymous | June 10, 2009

  12. Benny,You have totally missed your first point with CNG at 3,600 psi. This is a rather deadly and explosive rolling bomb in your trunk careening down those LA Freeways. If this went off, you'd be toast and so would others traveling near you in their own cars being hit by metal debris. People have been killed when filling up a transport propane tank in their pickup which was converted to run less efficiently on gaseous propane instead of liquid gasoline. And the propane is only compressed to 125 psi.Big difference when compared to CNG at 3,600 psi or Gov. Arnie's hydrogen hallucination needing compression to 10,000 psi or even 15,000 psi. Comprende?Cliff

    Comment by Anonymous | June 10, 2009

  13. “When oil gets to $200, people will have to ride the bus.”I do not think so! Food and energy have become a smaller part of a family’s budget every year. This trend is flattening out as it approaches zero. If you live less than 10 miles from work/school/shopping, fuel is about $2/day. The cost of energy for the home is about $1/day/family member. I could have chosen a place to live where I could walk and the kids could walk to school (like our last house and job) but the property taxes would have been higher than the gasoline. Standing in the rain waiting for a mugger does not sound like a good way to save money (assuming the bus costs less than $2/day)

    Comment by Kit P | June 10, 2009

  14. Benny – the Alternative Fuels and Advanced Vehicles Data Center: Alternative and Advanced Fuels page has info on various AFV specs and prices, and also a station locater that will show you all the local outlets for CNG, LPG, biodiesel, e85, electricity, and hydrogen; if any. Total for the US is 6164, contrasted with our ca. 190k gasoline stations. The kit for conversion varies with the fuel, flex fuel is a few hundred bucks, whereas the EERE lists the Honda GX with CNG added for an additional $6935 to the MSRP, this for fleet vehicles, which will be somewhat mitigated by tax breaks depending on the state you purchase it in. Other vendors offering aftermarket conversion for CNG seem to hover around $3-4k, not counting the need for an available fueling station. I would have to drive about 20 miles to get to the nearest CNG filling station. The alternative is, or rather was, to install your own Phill station, at an additional cost of ca. $3k, but they've keeled over as well: 'Phill' Natural Gas Fueling Station Maker Goes Bankrupt – GoodCleanTech.

    Comment by The Dude | June 10, 2009

  15. Cliff-The good news is that there are already 5 million CNG cars/trucks operating globally. It is a proven technology. As for price, my quick and dirty net research is that right now CNG is competitive with gasoline at about $1.25 a gallon. In other words, it is already cheaper than gasoline, by far. There are drawbacks. You don't get the range. The tanks are large and bulky. Danger is not a drawback. Some argue gasoline is more dangerous. Gas leaks tend to dissipate into the air. Gasoline leaks tend to catch on fire. I am not saying CNG is perfect. I am saying, it crushes the doom scenarios. We can drive CNG cars, PHEVs, scooters. Take busses. A guy who drive 20 miles to work using a 20 mpg car, then moves to 10 miles from work, and gets a PHEV or CNG. His daily gasoline consumption goes from four gallons to zero. If he gets a conventional ICE high mpg, say 40 mpg, and moves to 10 miles from work, his daily consumption goes from four gallons to one-half gallon. We may have another crude oil price spike–and very certainly, anther collapse. it is getting close to game over for the oil boys.

    Comment by Benny "Boom, No Doom" Cole | June 10, 2009

  16. “A guy who drive 20 miles to work using a 20 mpg car, then moves to 10 miles from work, and gets a PHEV or CNG. His daily gasoline consumption goes from four gallons to zero.”That would 2 gallons per day to 1 gallon per day sticking with the ICE. Being close to work implies taking surface streets. Keep it under 45 mph (what the hurry on a short trip) and not driving aggressively; we are down to ½ gallon per day.The catch 22 of PHEV or CNG is that you have to drive a lot to save money.

    Comment by Kit P | June 10, 2009

  17. "Standing in the rain waiting for a mugger does not sound like a good way to save money"That observation points to something important — there is a lot more to transportation efficiency than the price of fossil fuels.I worked for a while in the Former Soviet Union. Everybody "took a taxi" — which meant flagging down a passing car and giving him the equivalent of $1. Drivers were glad to do it, since they were paying highly-taxed Euro-style prices. Almost every car was a Heavy Occupancy Vehicle! Very energy efficient.You would even see scantily-clad single young women coming out of bars late at night and "taking a taxi". It was completely safe, since this country still had a Soviet-style justice system — very fast, very harsh.That kind of energy efficiency is simply not possible in the West. Too many bureaucrats interfering; too many lawyers suing; too many judges sympathizing with criminals.I have to agree with Benny — there are lots of possible happy scenarios out there. The problem is "us" — we tolerate a dysfunctional Political Class.

    Comment by Kinuachdrach | June 11, 2009

  18. Crud, Kino, I agree with you! Twice in one day, no less. Especially, these parts: remember that the money sent to oil exporters gets recycled into the global economy and [t]he problem is "us" — we tolerate a dysfunctional Political Class.Ouch! So true it hurts…

    Comment by Optimist | June 11, 2009

  19. Well, as Kinu alluded to: high oil prices may be bad for the US economy, but it is great for Mexico, Venezuela, Saudi Arabia, Iran, Iraq, etc. etc. In the end, the global economy probably shrugs it off.The more troubling part is the political implications: having Benny's favorite petro-dictators muscle up is not a pleasant thought. Then again, low oil prices probably means we sell America to China, so we have found a way to hurt ourselves that is independent of oil prices.Hmm. Sounds like what could be waiting on the other side of this recession is…a recession.I agree with that conclusion. The difference is that I would blame the Bush/Obama Bailout for Overpaid Rich Folks (BOBORF; as in ___).As Kinu pointed out, Europe has shrugged off an effective price of $250/bbl. And, no, Rufus, Europe's lower medical bills is mainly paid for through higher taxes. They survive high oil prices by driving smaller vehicles, not that far and using public transport…King, are you still around? You might be interested in the Brooking's Institutes conclusions on the role of speculators: I therefore conclude that these two factors, rather than speculation per se, should be construed as the primary cause of the oil shock of 2007-08. Certainly the casual conclusion one might have drawn from glancing at Figure 1 and hearing some of the accounts of speculation — that it was all just a mistake, and the price should have stayed at $50/barrel throughout the period 2005-08— would be profoundly in error.And But while the question of the possible contribution of speculators and the Fed is a very interesting one, it should not distract us from the broader fact: some degree of significant oil price appreciation during 2007-08 was an inevitable consequence of booming demand and stagnant production. It is worth emphasizing that this is fundamentally a long-run problem, which has been resolved rather spectacularly for the time being by a collapse in the world economy. However, the economic collapse will hopefully prove to be a short-run cure for the problem of excess energy demand. If growth in the newly industrialized countries resumes at its former pace, it would not be too many more years before we find ourself back in the kind of calculus that was the driving factor behind the problem in the first place. Policy-makers would be wise to focus on real options for addressing those long-run challenges, rather than blame what happened last year entirely on a market aberration.So much for the blame the speculators theory…

    Comment by Optimist | June 11, 2009

  20. Benny Boom! (no doom :-)Splintering away from the long recession here:I realize that natural gas compressed to 3,600 psi isn't q u i t e as dangerous as is hydrogen compressed to 10,000 or 15,000 psi. The only difference between compressed hydrogen and compressed methane is one carbon atom per molecule.However, the very same basics apply here — even with compressed propane when used as ICE fuel. Please think of C3 propane as three C1 methane's joined together. OK? And I'm speaking here of compressed ANYTHING used to fuel the public (over the road) transportation sector!I also realize that motoring around with 20 gallons of petrol sloshing in the tank at ambient temps and pressures is ALSO quite dangerous too! We motorists forget about the rolling bomb which we are driving stop light to stop light or at 80+ mph on the freeways where motorists will drive to maximum extremes.Remember, it was only recently that T. Boone was running his multi-million dollar ads on the TV networks promoting wind power while anchoring his entire message with abundant domestic methane reserves/converted to CNG becoming the near-term domestic "answer" at the filling station pumps. With every viewing of this internationally viewed TV message, I kept feeling that he was wrong, wrong, wrong! And I'm talking simply about public safety issues here, nothing else.A very elderly and very experienced energy scientist whom I co-write patents with (he's 86 yrs. old) has this to say about compressed hydrogen which we and others refer to as the "hydrogen hallucination," and a deliberate, diversionary ruse of dis-information aimed at the public and fuel cell investors. I could add pages to his short statement below, — as I'm aware of many more details therein, yet I'll refrain — with my closing statement anchoring in basic chemistry instead… Pressurized, highly explosive hydrogen wants to mate with atmospheric oxygen and therein form a H2O water molecule. Friction generated in unpurged regulators becomes the auto-ignition component which make pressurized gasses go Boom! Ever heard of a hydrogen bomb? It is apparent that Gov. Arnie has not. I sincerely hope we don't see widespread movements toward compressed natural gas for everyday transportation.Cliff"Hydrogen is too dangerous for the open road. It also is very difficult to contain. Being the smallest molecule (#1 on the periodic chart of elements) it can find the infinitesimal hole to get through. When I worked with hydrogen, I was always on the lookout for leaks and fixing them. We lost the lives of three Federal workers when a hydrogen cylinder was contaminated with some air and upon opening the cylinder valve to an unpurged pressure regulator, the cylinder exploded, set off by the heat of compression that was generated in the regulator. I can't see the public continuously exercising the cautions necessary to prevent disasters, let alone living with the ever present danger from auto crashes.”

    Comment by Anonymous | June 12, 2009


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