Tuesday, February 24, 2009

Part 6: Oil Prices - the Big Crash

Surprizingly, in my presentation to the CSEG I felt the urge to remind everyone - including myself - that there was no guarantee that oil prices would not decrease in the near future. While most of the evidence suggests that it will be very difficult to increase world-wide production levels very far beyond 86 million barrels/day, it is certainly possible to drastically decrease consumption. This is exactly what happened in September 2008.

Every sector of the economy consumes energy to create and transport goods. The transportation sector alone accounts for something near 70% of US oil consumption and 55% on a world-wide basis. When the price of oil became too high, people responded by selling SUVs and buying hybrids, driving less, taking public transit or car pooling. More drastic effects occurred when new car sales plummeted, which resulted in factory closures which resulted in massive lay-offs which resulted in a huge reduction in commuter miles because those factory workers were no longer driving to work. Then truckers were laid off because parts were no longer being hauled to the factories and new cars were no longer being shipped to a nation-wide dealer network. Laid-off workers bought fewer goods and services and this resulted in bigger reductions in the freight hauling industry. All of these actions decreased demand and freed-up capacity in the energy supply chain.

All of us had a front row seat to these events. It certainly had a big impact for our family. In August, as we made our way to Georgia we had to pay over $4.00/gallon for diesel fuel. You can bet that got expensive pulling our trailer! By mid-September we were actually seeing fuel shortages in SouthEast Georgia and several gas stations could not obtain fuel.

Then things shifted in a big way. News of factory closures and layoffs were an everyday occurrence. The price of oil started to slide - then plummet - as illustrated so well in this graph from wiki. If you have the time, the related article is certainly worth a read:


Diesel was about $2.40/gallon as we made our trip back to Canada in December.

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