Relevant and even prescient commentary on news, politics and the economy.

Peak Oil and prices in two years from now

By One Salient Oversight

Summary: Oil prices are dropping as demand destruction bites. But that
doesn’t invalidate Peak Oil. Supply limits will continue to exist even
when oil prices and demand drops. This means that the price of oil will
still be too high even when the economy is at its lowest ebb.

The economic stress caused by Peak Oil will not be quantified by how
high oil prices rise, but by how low oil prices don’t drop.
Okay, so the allegory goes like this: Oil prices are like blood pressure
in that the record price of oil ($147.27 on 11 July 2008) represents a
systolic price – the maximum price of oil that the market is willing to
pay under current economic conditions. But, with the clear presence of
demand destruction caused by current economic strains (including the
effects of high oil prices and the subprime meltdown to name just two),
the price of oil is now dropping.

But, just as a diastolic reading can be too high, so can the price of
oil when it falls. If Peak Oil is true and there is a geological limit
to how much oil can be extracted, then it stands to reason that this
will not just create record high oil prices, but also oil prices that
are too high when demand has fallen.
Peak Oil commentators and “experts” will probably use this
latest report (EIA report on massive drop in US oil demand in June 2008)
to prove their assertions that the high price of oil is merely the
result of “speculation” and can be lumped together with the entire
commodities market. In their minds, oil and commodities will, at some
point in the next few years, return to “normal” levels.

So, same data, different conclusions. But it will be the next two years
that will vindicate Peakniks – not by some magical rise in the price of
oil back to $149 per barrel again, but by the stubborn refusal of the
market to lower the real price of oil back to pre-2004 levels.

So what will the price of oil be? That depends, of course, in just how
far the world economy contracts. A real price of $40 per barrel may
actually be reached again – but this price will still be too high for
the market to consider reasonable. And when the world economy begins its
recovery (as is inevitable), then any increased economic activity will
be severely limited by relatively high oil prices occurring again. And
these prices don’t have to be up around record levels to stunt any
recovery – they may still be below $100 to make life difficult for the
So, to summarise my prediction – I predict that oil will drop below $100
in the next 12 months, but remain too expensive for the market to be
happy with over the next 3 years.

And that, of course, will keep the diastolic blood pressure of the
economy at dangerous levels.

by reader One Salient Oversight

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Real GDP Report

Sorry I’m slow posting this, but I was busy elsewhere yesterday.

To understand the real GDP report you need to look at the monthly data.

Real GDP is a measure of output. But we do not directly measure output. Rather, we measure consumption and adjust that for changes in trade and inventories to indirectly measure output.
Because of this methodology the trade and inventories data are measured from the end of the quarter to the end of the quarter in contrast to the other data that is the average of the three months data.

This quarter the difference was significant. Of the 3.3% growth in real GDP 3.1 percentage points was due to trade. Of the 3.1 percentage points some 1.65 percentage points stemmed from improving exports from March to June. But look at the chart. In March real exports dropped sharply below trend before rebounding back above trend in the second quarter. Much of this was the impact of a strike in the auto parts industry on US – Canadian auto trade. So a significant part of the reported surge in exports really reflects weakness in the first quarter data,
and a significant part of the second quarter growth probably really belongs in the first quarter.
But the pop in second quarter exports to above the growth trend probably is not a break in trend. It is likely to reverse, especially with world economic growth slowing.

Weak imports accounted for 1.45 percentage points of second quarter growth. This is largely a lagged function of weak domestic demand in earlier quarters. It does not reflect growth. Rather it reflects how the economy has changed and how we now export recessions abroad. It is part of the great moderation story. It was more weak demand than the dollar as the oil data shows.
In the second quarter real oil imports clearly broke below the flat trend of the last few years
and although oil imports should remain weak another sharp plunge like we just saw is unlikely.

Note, I am using percentage points rather than % because these numbers are additive.

P.S. In the second quarter real personal consumption expenditures rose at a 1.7% rate.
The July data just released implies that we are starting the third quarter with real PCE growing at a -1.4% annual rate. It is just one months data, but it is not encouraging.

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New posting rules, comment removal


Updated January 23, 2009

Comments to date have been generally relevant and appropriately documented. ‘Coventry has been removed for now as no longer necessary and moderating has become routine and rarely used. All the Angry Bears thank readers for their respect and tone. It is reciprocated.

The blog owner and moderators reserve the right to delete offensive comments, and encourage publicly on topic, clear, and insightful material from all. It is readers who make open commenting possible, which is a joy to behold in the blogging world. Congratulations to us all.

P.S Trolls will still be dealt with quickly and thoroughly.

Update Sept 23, 2009 Editorial Policy of main posts and comments.

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Jonah Goldberg Says Things Aren’t That Bad

Jonah Goldberg comments on the Biden speech:

Biden’s doing a great job, just as I expected. But come on: To listen to the Democrats you’d think the Great Depression was a day at the beach. There are economic challenges out there, hardships etc, sure. But you’d think we’re all living off of puddle water and grub larvae from the way they talk about life in America today. I think at some point the disconnect between the country these people are describing and the country we actually live in is going to undermine the Democrats’ credibility.

Gee – I listened to Biden’s speech and he did not say things are worse today than they were in 1932. But then how would Momma’s Boy Goldberg know what transpired way back then – since he loves to argue when someone else is recounting a historical period, Momma’s Boy wasn’t even out of diapers – he had not been born yet. If the folks at the National Review want this campaign to turn on whether folks are really suffering versus whether we are all a bunch of whiners – be my guest. If this is the GOP tone, Barack Obama will win in a landslide.

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Real Per Capita Income

Yesterdays release of real income data has received much commentary from blogger. Many ways of looking at the data and many excuses for the data have been proposed. Often I read comments about how the use of household and/or family data biased the data. And there are some validity to the comments that different ways of looking at the data generate certain problems.

Perhaps the simplest way of looking at the data is to use the most basic unit and look at the growth in real per capital income. With this series at least there are no change in the composition of the unit that could bias the data.

As this chart shows growth in real per capita income growth is showing a long run trend of slower growth and in recent years the growth has been especially slow. Out of the past seven years real per capita income fell in five years.

If you do a seven year moving average it shows that since George Bush took office real per capita income growth has been negative. It is the worse economic performance in the modern era.

Way to go Team Bush.

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Immense Budget

The whittlin’ demands an immense budget. Perspectives:

Chart 3: FY 2008 outlays:

Defense Discretionary 20.5%: Non Defense Discretionary 20.8% : Social Security Medicare/Medic Aid 20.1%: Other Mandatory 12.8%: Interest 7.9%

Table that defense discretionary has grown faster than non defense discretionary and is a larger part of federal spending than in the former adminstrations.

Table S-3: Defense: FY 2001: $302.5B Fy 2009 Request: $515.4
A cumulative 70.4% increaseover 2001.

The operating costs of the wars are paid off budget with supplementals.

See: Table 6-1 Pg 62 and following:
How could the DoD not be refitting the force structure worn out in Iraq and Afghanistan and then some, a huge sum for procurement? Figure 1 below shows procurement increasing while R&D is declining, see figure 2, I conclude either they are paying a large amount of hedonic inflation or the stuff broke in Iraq and Afghanistan is being refitted and replaced. Most likley they are making the wrong things which don’t work.

Figure 1: Total Obligation Authority for for DoD Procurement in constant 2008 dollars from 2001 to 2011 FY 2008 Greenbook, see link

Figure 2: Total Obligation Authority for DoD Research and Development (R&D) in constant 2008 dollars from 2001 to 2011 FY 2008 Greenbook, see link

Figure 3 below concerning Operations and Maintenance (O&M) seems to indicate either the forces are not being trained and maintained (throw away the dusty junker and buy new every so often) or the supplementals are taking on the support for the deployed forces. O&M is also indicative of the army of well paid contractors doing profitable work where they can cut back on Military Personnel (Mil Pers) see Figure 4.

Figure 3: Total Obligation Authority for DoD Operations and Maintenance in constant 2008 dollars from 2001 to 2011 FY 2008 Greenbook, see link

Figure 4: Total Obligation Authority for DoD Mil Pers in constant 2008 dollars from 2001 to 2011 FY 2008 Greenbook, see link

by reader ilsm

From the declines in FY 06 and beyond I think they need a new enemy to turn the growth rate up for whittlin’ the warfare machine.

Also from the Greenbook: DoD Total Obligation Authority Constant 2008 dollars over past forty one years:

1967 $504,647M Largest during Vietnam conflict
1985 $52o,241M Largest during Reagan whittling spree
2006 $524,686M A big year for the Global War on Terror. There are more half trillion dollar obligation authorities since 2003 than any other period since the 1950’s.

If peace and or sanity ruled the pentagon what would I write about?
by reader ilsm

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Comments and bar brawls

Nieman watch dog carries a summary of some research. The quote here is a summary of conclusions we might use.

Journalists should avoid presenting both sides of a story when one is false – and take into account how readers’ brains process the disagreements. The following four rules can guide their efforts.

1. State the facts without reinforcing the falsehood

2. Tell the truth with images

3. Provide a compelling storyline or mental framework for the truth

4. Discredit the source

This is one reason that propagandists can be effective simply by creating confusion. Unscrupulous campaign strategists know that if their message is initially memorable, its impression will persist long after it is debunked. (See source amnesia and emotional selection)

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McCain’s Tiny Ad – Steven Benen Calls Them on Their Dishonesty

Rachel Weiner does two things. First, she provides a transcript of the latest lie from Team McCain:

ANNCR: Iran. Radical Islamic government. Known sponsors of terrorism. Developing nuclear capabilities to “generate power” but threatening to eliminate Israel. Obama says Iran is a “tiny” country, “doesn’t pose a serious threat”. Terrorism, destroying Israel, those aren’t “serious threats”? Obama — dangerously unprepared to be president. JOHN MCCAIN: I’m John McCain and I approved this message.

She also shows why this is misleading. But calling Team McCain on their latest lie was not enough for Steve Benen:

I’ll give the McCain campaign credit for one thing: these guys are among the most accomplished liars in a generation. Sure, some shameless charlatans have come and gone over the last few decades, but when it comes to genuine, almost pathological, dishonesty, the McCain campaign is setting the bar very high (or low, depending on one’s perspective).

It is true that the entire Team McCain campaign has degenerated into Rovian smear tactics which in almost every case is based on one lie after another. I don’t trust our press to do their job as they have not so far. Someone needs to say these loud and clear: Team McCain is offering no particular reason for John McCain to be President – unless having a serial liar as the nation’s leader is a high priority for you.

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