Note that it appears that global crude oil consumption only fell one year in the Thirties, in 1930, with rising consumption thereafter, and as Downsouth observed there were three million more cars on the road in the US in 1937, versus 1929. Today, hundreds of millions of people worldwide want to drive a car for the first time. Also, after hitting a low in 1931, oil prices rose from 1931 to 1937.

Monthly constant dollar prices in the Thirties:

http://mjperry.blogspot.com/2008/11/oil-shock-of-1930s.html

In regard to net oil exports, note that the US went from finding its largest Lower 48 field, the East Texas Field, in 1930 and from being a leading net oil exporter, especially during the Second World War, to net oil importer status in only 18 years (in 1948).

Hi Rune

Like you I've spent a bit of time looking at oil consumption in terms of gdp and the link between the two. I think I had it at about 0.4% change in oil consumption = 1% change in gdp for a period 1985-2003 when oil prices were relatively stable. I would be interested in looking at any data summaries or graphs you have compiled - any chance you can link or post these please?

One thing you will have to take into account, especially if comparing the US to Europe, is the continuing higher population growth of the former. If you look at real growth in gdp/capita for the US it's even more anaemic than just adjusting for energy costs!

TW

Opps :)

You mean there is something outside the US ?

Seriously though on that note as far as I know Chinese consumption is still increasing.

The main point is the interplay between the debt bubble and oil prices is complex a simple argument that high oil prices
decrease the ability of people to service other debt is sufficient as a base argument. But outside of this my opinion
is that the debt bubble overwhelms oil prices.

Your not following all the loans the seller himself has a loan thus he makes the difference between his outstanding loan value and the sale price of the house. The cash if you will entering the economy is the various commissions and fees.

I'll give you a common example. Buyer A is a first time buyer and buys B's house for 200k USD. Seller B paid 100k for house 10 years ago.

Buyer A takes out a low down no down payement loand on house Seller B then goes on to buy a house for 400k that was 200k ten years ago.

We have tax laws in the US the defer tax for profits if your both buying and selling a houe.

So B has say a profit of 120k and he rolls 100k into his 400k house with a loan of 300k and blows 20k as payments for say and SUV and furniture for the big house.

Now lets say housing prices fall 50%.

Buyer A is underwater by 100k house value now 100k
Buyer B is underwater by 100k house value now 200k

The "profit" your talking about is completely gone.

The only way to retain this profit would have been to sell and rent or move to a much cheaper area and probably even then buy
the same house. This is why so many people from California where moving to surrounding states and on to Texas.
Even then they will take a certain hit. So there are other scenarios that work out.
But for every case that someone did the math and retained the profit you have probably 100 cases where everyone just moved up
taking on ever larger debt loads. In a lot of cases these move up buyers did not even put 20% down but kept the cash and took
out a dubious loan.

In cali in many cases it was B i.e the buyer seller selling his 100k house for 200k then buying a 800k house with basically nothing down.

In any case all the transactions that worked to cause a net increase in the debt level i.e most of them since the 1960's where increasing leverage in the system the loan to equity ration was slowly declining until it went to zero now at that its at zero the leverage blows up the moment house prices decline.

Also in many cases even people that put 20% down turned right around and HELOC'd out the down payment to make the payments buy more houses etc etc so often this equity and later appreciation did not stay in the house for long. Many long time mortgage payers took out substantially all of their value increase over the last several years.

Thus you have to look at the overall flows and the overall flows have lead to ever dwindling equity and housing prices increased until finally of course it all blew up.

Now you have to look at who really made money playing this game. Of course its the bankers if you look at an amortization table for a standard 30 mtg you will see that the interest payments are front loaded on the loan. Thus the real interest rate you pay is much higher in the first ten years of the loan if you pay the loan amount off. In fact its practically the same is paying rent these mortgages are really just a sort of rent to own contract that results in little equity gains in the first 10 years.

Given that the losses are socialized i.e if a bank goes under the loan losses are written off you have and enormous sum of money flowing into the banking industry. For most people it represents a 50% tax for all intents and purposes levied by the banking industry.

The rate that wealth is concentrated in this ponzi scheme is enormous and the length of time it ran astounding. Now where did this money go ? Eventually most of it after getting concentrated in the hands of bankers flowed back out into equities buying up companies via new loans and eventually via leveraged buyouts as the amount of concentrated money grew large enough to start buying up large companies outright.

The bankers owned your home and they owned the company you worked for they owned the stores you shopped in and you had no savings so every penny you spent you paid interest to the bankers on.

And everything works until the debt load gets so high that defaults become rampant then it all falls apart and the banks are left with trillions in bad loans. But of course the bonus's have all been paid and the mansions and yachts purchased etc. So yes wealth was generated in a sense but most of it went into luxury items for the very rich that also suffered inflation as the wealthy competed for the best houses. They also played the same game over paying for assets and they also leveraged up ( Hedge funds).
Almost everyone was leveraged to the hilt.

My argument is that energy flows played a secondary role to this ponzi scheme and that the job of the central bank was to ensure that this massive ponzi scheme did not bleed over into the real economy resulting in a price/wage spiral as basic commodities increased in price and workers had no choice but to seek higher wages. You have no choice if food prices are spiraling but to seek a wage that you can at least eat on. By having the money flows directed into paper equity profits the effects of inflation are masked.

Thus my guess now that the mortgage bubble is blown up is that attempts to reinflate won't do anything but force commodity prices higher and put pressure on wages and of course interest rates. But rising interest rates would simply force the housing bubble down faster.
And of course you can see how peak oil can interact badly.

Now unlike a lot of people I'm actually not all that worried about the trillions in losses associated with the blown housing bubble this debt is going to be socialized and put on the Government books. It means the government is going to run out of credit but the sooner their hands are tied the better. They will of course eventually raise taxes to punishing levels but so what it just send the economy deeper into a tailspin. What do they get in the end ? Some more houses that we don't need and some SUV's ?

Basically they can socialize the losses as long as they wish it does not change the situation it just turns a fast banking collapse into a multi-decade depression ala Japan.

But Japan has to export its ass off and devalue the hell out of its currency and effectively impoverish its people for decades to prevent collapse. I'd suggest that the US can't export its debt the rest of the world simply cannot afford to buy it.

It can't internalize the debt via high taxes since the people can't pay. It can't really print money since this will eventually lead to commodity inflation.

I really don't know for sure how things will play out we are at the end of a old monetary system and every attempt will be made to ensure that we can sneak into a new one without paying our debts. I suspect the game will fail its always failed regardless the Kings and Empires of past ages always debased the currency before they fell and they fell non the less.

Historically you end in rampant inflation with the currency completely worthless but I actually wonder if this will be the route we go down at least for a while. We just have to wait and see if commodities start on a price spiral. Historically before mortgages attempts and inflation always hit the basic needs the hardest. I think we are going to have to have that happen first before we see what happens next. The reason food and now energy gets hit first during a round of currency devaluation is that these are generally consumable item with the cost basis rising quickly following a devaluation of a currency i.e the farmers costs closely track real inflation they increase prices to ensure they can afford to plant next years crops.

So right now my bet is on good old traditional commodity inflation esp given peak oil. We will continue to see debt deflation for decades to come or at least as long as our current monetary system exists so a return of the debt ponzi scheme is impossible.

How long ? I doubt we make it through the year before the new system starts to take hold. My best guess right now is a currency crisis involving the GBP and we will save it leading to shaking up other currencies and this will probably lead to the Bond markets reacting badly as government bonds are no longer viewed as a safe haven. This sets off commodity prices and forces interest rates higher and then we are off to the final race. Basically once we see commodity prices increasing and interest rates increasing its game over.

The final wealth extraction scheme I see is for rising commodity prices to become the key source for flow of wealth then rising intrest rates attract this wealth to fund government debt thats monetizing our old housing debt. We cycle it through food and energy which people have to buy. Ever increasing government interest rates attract this money and funds the debt.

I think thats how the old debasement schemes worked the commodity prices skyrocketed the farmers made a profit then bought government debt at attractive interest rates to keep from having their profits inflated away. This game was played often in the past.

http://en.wikipedia.org/wiki/Roman_currency

Whats left out is the flow of funds into the government itself i.e loans the governments take out from the wealth citizens who own most of the farmland and a lot of the trade. Eventually debasement in my opinion forces people who are trying to concentrate wealth to loan money to the government with interest to cover inflation. Monetary systems seem to almost always work in such a manner that the government is given almost unlimited borrowing capacity. Wonder why :)

You don't know much about construction loans ?

I'd be careful using whale oil as a perfect predictor of future oil prices. Just like using the first depression as a model for our current one. Certainly there are valid point but also the systems are intrinsically different enough that the future will not follow the past.

For the Great Depression the overlap is pretty good during the initial collapse phase but our society is fundamentally different from the 1930's so I expect that the similarities with the 1903's will decline with time and we will go down our on unique way. From energy to demographics the fundamental differences will cause us to diverge from the self similar monetary collapse. Housing itself is fundamentally different from the 1930's for example with far less equity in homes with mortgages. Far more will be upside down earlier in this collapse vs the 1930's. The number of farmers is far lower. And hmm dependency on oil based fertilizers and mechanization higher ( Need I remind you :)

For Whale Oil substitution with rock oil was valid so again outside of the initial onset of volatility signaling peak we simply don't know the future price changes. The basic argument is demand destruction I argued in my other post that true demand destruction is a loosely coupled event with little overlap between demand declines this implies that wild price swings won't happen and that the later price swings in whale oil where possible because of the onset of substitution. Without substitution after the initial demand pull back which may result in volatile swings in prices we may not see any more.

Put it this way pretty much for any system right at its peak you get a highly correlated pullback this is the cause of the peak but as you decline correlation of the components decline. Volatility is possible when events are highly correlated but not when they become uncorrelated if we have no driver for correlation you cant get fast enough swings to occur to cause large spikes and drops.

Think of a herd moving together over a cliff we have already done that in our case most survived the drop now its every man for himself and everyone is moving independently.

In fact globally we will see more and more retrenchment and pullback from globalization as everyone focuses on boosting domestic consumption. This of course leaves the only strong connection being global commodity supplies i.e food and energy.
And this connection is in general positive in the sense that everyone is trying to keep consumption of food and energy constant to growing. Sharp pullbacks in either are now highly unlikely even at the regional level.

Good point. It's true that I missed this period, when oil prices exceeded $74 by 0.3%. I was focused on the two months following July, 2008. I suspect that June and July were inventory drawdown flukes--as producers took advantage of the highest oil prices in history, followed by sharp reported production declines in August and September (rebuilding inventories?), in a period I would not describe as "collapsing" oil prices, since both months exceeded the annual average price of $100.

Of course, as I outlined in other threads, the price/production model broke down in the Lower 48 and the North Sea in 1970 and 1999 respectively, where we saw declining production in response to higher oil prices. Oil prices went up by more than ten-fold from 1970 to 1980 and about five fold from 1999 to 2008.

And of course mathematically, regarding conventional production, the world was to 2005 as the North Sea was to 1999 as the US was to 1970.

In contrast to the 43 month period ending on 5/05, when we saw a significant increase in world production in response to higher oil prices, in the 43 month period ending in 12/08 we saw a cumulative shortfall of close to a billion barrels oil--between what we would have produced at the 5/05 rate and what we actually produced (EIA, C+C). Average annual oil prices went from $56 in 2005 to $100 in 2008. In other words, like the Lower 48 and the North Sea case histories, the oil industry worldwide delivered less oil in response to higher prices.

Euan disagree 40 is not ten its 75% higher and the dollar is very strong right now so financial arguments point to lower prices.

As far as $40 bolstering demand economically we are getting close to the bottom of a normal recession yes its global and yes its deep but
you can read about economic indicators and recessions here.

http://www.calculatedriskblog.com/2009/03/hamilton-what-will-recovery-lo...

But understand things are still heading down.
http://www.calculatedriskblog.com/2009/03/empire-state-manufacturing-sur...

If the economic models and supply models where correct of a significant amount of excess capacity and an equal fairly large drop in demand where true we should now be approaching a minimum price point. With what seems to be the generally accepted model whats happening now should not be happening. Note we have not quite reached bottom according to standard indicators but we are approaching at least
the second half of recession and oil demand should technically still be dropping.

My own model has been that the price of oil collapsed because of a number of factors financial problems, A unsustainable Saudi surge, Damage to US facilities from the hurricane leading to both inability to import a significant quantity of oil and to 1/4 of the US experiencing forced shortages. And finally to a overall erosion of demand from the general economic downturn.

Only the demand erosion was relatively long term and from my research of the rustbelt and oil usage in economically depressed areas the result I got was that demand generally only fell say 3-6% then flattened pretty much becoming constant per-capita.

With my model demand should be fairly constant. Now with my model all you would get is a flattening of oil prices if capacity was in excess. This flatting occurs as the short term oversupply becomes allocated and demand and supply are in balance. As long as supply is adequate we should not see strong increases in price.

Its to early to tell yet but this does not seem to be whats happening what seems to be happening and to be clear time will tell.
Is that the short term glut made the bulk of the contribution to the drop in oil prices but supply was also steadily dropping this means that supplies may soon become strained and we are supply constrained.

The fact that we did not reach 10-20 a barrel and see the futures market collapse destroying the long term market contango indicates the market never priced in a longer term supply excess. The market itself never ever said it had plenty of oil. In fact the steep contango actually caused it to be profitable to store oil for later delivery. Well now its later. The market may have well mispriced the absolute price of oil over the short term but if anything its indicating that prices went to low for a relatively short period.

But if your looking at the market from a fundamental perspective the most important piece of info is not price but direction of prices and where the bottoms occur. The way the current market is moving indicates we may very well see us move from a standard recession albeit a deep on thats probably L shaped to a energy supply induced depression.

People that predict oil prices will only recover once we start a recovery are in my opinion simply full of crap they where wrong about supply and demand and prices as we entered the current situation and they will be just as wrong as we move forward.

And last but not least the other half of my argument is that high oil prices in themselves did not reach a level in 2008 to cause significant demand destruction because of oil prices alone it was the secondary effect they had on reducing the ability of consumers to service the crushing debt loads they had acummulated. The combination of insane debt loads and rising fuel and food prices help push many into default. The primary problem was debt and oil prices played a small but important role is helping prick the debt bubble.

This is important because we never reached the level of energy prices required to force a pure energy price induced depression. And its a depression not a recession since its a permanent decline. Unless we see oil prices moderate in the coming months then we will in my opinion see this debt induced recession transition into a energy price depression with no recovery.

The only thing that will cause this is if the claims of spare capacity are real if they are then oil prices will moderate at some level probably below 100 a barrel say 50-60. As prices approach 60 and cross over more OPEC members will cheat and we will experience at least a moribund economy.

If I'm right and now you can add Simmons who is saying the same thing I am then we won't see this oil prices will simply climb steadily and faster as the short term surge is finally burned off and they will go to whatever level is required to cause a energy induced depression and real and permanent demand destruction.

Whats important is the way prices move and when they make their moves prices bottoming out right now is for me a huge red flag that throws out the "traditional" view of demand destruction and ample supply.

Whats the density of heavy crude vs light ?

Do you always have to fill your tanker ?

Many tankers actually make multiple trips say they take oil from the Arabian gulf to the US then they pick up a load in Africa and go back to the US or to Europe.

A lot of oil moves by pipeline and not ship.

Saudi Arabia owns its own tanker fleet it can fill its ships as full as it wishes and deliver what ever it wants.

Just the differences in oil densities alone is a problem. And of course as non-OPEC sources decline OPEC sailings replace them and they are generally longer haul voyages.

Next of course a lot of the trade is not crude oil but finished products also shipped in various tankers including bunker fuel and other grades of crude. And of course you have tankers used periodically as floating storage further confounding tracking tanker traffic.

So no its not obvious. In fact WT export land model which seems valid is difficult to prove from tanker traffic alone. It works regardless of the price of oil as long as demand is growing in the exporting countries and it works even if their production is climbing.

I challenge you to say develop the export land model for Nigeria given their internal demand changes and production level from tanker traffic data.

Here is some data.

http://www.nationmaster.com/time.php?stat=ene_oil_con-energy-oil-consump...

Another link

http://www.wtexecutive.com/cms/content.jsp?id=com.tms.cms.section.Sectio...

The challenge is to find tanker data for Nigeria and then replicate the export level vs reported overall production and the reported internal consumption.

Good luck.