The Oil Drum: Europe

A very clever friend suggested I check that the red curve isn't a simple offset of the blue curve - I did, it isn't, the exponential function is definitely steeper.

The price behavior seems to defy economic sense. The price elasticity is getting LESS elastic as the price goes up rather than more elastic. It has also been more than 3 years since prices started to rise, so longer term elasticity should be kicking in. (and we have reports of record mass transit usage, so we know something is happening). But that is not slowing the price rise.

Worse, the world supposedly had a rise in oil production last fall/winter that broke the 2005 production numbers. Yet the price did not drop back to 2005 levels. No, that was in the middle of this rapid price increase.

Intuitively, what I feel is happening is that in 2002 - 2007 the poorer consumers were pushed out of the market. They had more elastic demand to oil price. Now that they are gone, wealthy consumers are the only ones left. USA, Europe, China. Those remaining are much less elastic.

I think we are going to see a sigmoid price response. Sigmoid Curve Shape

Where the top part of the curve is set by the maximum value for a barrel of oil. A rough estimate of the maximum value comes from GDP/Barrel of oil Equivalent energy consumption. Roughly $600.00 ($2006)

However, it takes about half the energy of a barrel of oil to use that oil (energy for extracting the oil, building the roads, building the cars, maintaining those cars) so at a price of $300 a customer would be trading back to the supplier the whole value they could expect to get from the oil.

I don't think that price can be sustained for long. It can only happen when subsidized by other energy sources. Or when the purchasing country starts selling off embodied energy to pay for the oil. (like selling banks and farmland etc).

What I feel this Post on Whale Oil is mostly saying, is that humanity has no models for what will happen as a major energy source depletes on a world wide scale. We have always had another (often better) choice. Now, at best, we have worse choices (electricity). And what will happen to the price will need to be determined by model rather than by analogy to past events.