Is Fuel Price Yo-Yo Broken?

I've posted on the yo-yo before. Basically it was a simple peak oil-based supply and demand system that had some logic to it. Speculation aside, it helped explain how and why oil was rising towards $150 last summer, and to a lesser extent why it began to fall off from its high of $147. But when demand started cratering in the fall, though the y0-yo effect would have predicted it, it had little to do with the high price of oil. The drop in prices turned out to be connected more closely with the sharp global economic downturn that became visible to the mainstream in 4Q08, and that signalled an almost unprecedented drop in demand. 6 months in, and we're seeing the next major snap of yo-yo take shape.  The WSJ reports that there are:  

mounting signs that the economic crisis and lower oil prices are shuttering projects around the world. OPEC countries—which meet next week to consider another output cut—have voluntarily slashed production by around three million barrels a day since last fall.  But the big and lasting cuts are coming in non-OPEC countries, where companies are postponing or canceling projects in droves. Bernstein Research said this week that non-OPEC oil production could fall by 2.5 million barrels/day over the next year.

A drop that steep,  analysts say, would more than make up for the steep fall in global oil demand. PFC Energy said in a report this week that it expects non-OPEC supply to continue to droop next year, losing an additional 460,000 barrels a day. Oil gurus at Barclays Capital predict that the fall in demand will become “less precipitous in coming months, while the supply-side contraction starts to bite and the impact spreads out from the physical markets.” Translation: Higher prices.

This time it's not rising demand that's looming (though many wish it were); it's falling supply that's going to drive the price up. I see a future yo-yo post on a reaction to higher prices in the form of more oil development. How it plays out timing-wise vis-a-vis a global economic recovery is the real wild card.

Photo of ancient Yo-Yo player: Wikimedia Commons

Current Events: Oil Price Yo-Yo now Walking the Dog

Once they have the basic down-then-up motion mastered, one of the very first tricks novice yo-yo practitioners attempt is called "Walking the Dog". This is where the down motion is followed by the yo-yo continuing to spin while staying down (called a "Sleeper") and is then allowed to roll across the floor a bit. With practice, a prolonged "walk" will end with a subtle wrist flick that sends the yo yo flying back up to return to the hand from which it came. Very predictable once you get the hang of it.

Translation: oil's at $59 a barrel tonight and showing no sign of returning to $100, let alone its recent high of $145 anytime soon. And attending the oil price fall, US gasoline prices have dropped for the 17th straight week and are now under $2 a gallon in some locations. In fact, it's not clear that the oil price yo-yo is even in "walk" phase yet.

At the same time, anemic US auto manufacturers are indicating that they're on the verge of collapsing if they don't get a Federal infusion pretty soon. They've already been lent billions to retool to build cars that get far better mileage. Left to their own devices, they weren't ready for this summer's price spike, and they're not ready for the economic downturn now. Lessons for those steering the US economy and industrial base are many, not the least of which is that in a peak oil climate, whatever the price of oil is today, that's what it's least likely to be tomorrow. Ditto for 1, 5, 10, 20 years down the road. Future DOD planning needs to take this volatility as a given and not let it get in the way of specifying systems that are far less impacted by this highly volatile commodity.

Fuel Price Yo-Yo & DOD Implications

I'm not the first to put it like this. There's an oil price yo-yo going on right now: price goes up, use goes down. Use goes down, price goes down. Price goes down, use goes up, etc. It could be like this for quite a while. However, some people are aiming to give this yo-yo a jerk.

Former SAP VP Shai Agassi has a plan to get the world's cars off oil. I wrote about him here in January when gas was hitting $3 a gallon, and Wired just did a cover story on him here with gas in the US pulling back below $4.

Well, there are a heck of a lot of folks working on this problem and he's just one guy, relatively young, and with very little energy or transportation experience. So he's probably not going to do much, right? But what if he's even partially successful?

Fewer combustion engine cars will mean lower oil demand. Look what's happened to US demand and gas prices in the last few weeks. If entire countries get off oil, demand will plummet and prices will drop. Perhaps this means the Air Force and the air industry will get a a longer runway to develop alternative fuels and approaches as jet fuel remains more affordable, longer?

As a friend if mine said, though, the yo-yo effect doesn't go on forever. At some point further along the Peak Oil curve, use goes down and prices still go up. Well before then it will be good if the Air Force has transitioned fully to the synthetic fuels its aggressively pursing today. F-15s just hit mach 2 on synth fuels !!!

WSJ Calls Out Oil Supply Yo-Yo Effect

As mentioned here previously, oil price movement in the era of Peak Oil (or geopolitical Peak Oil) works like a yo-yo, or if you prefer a bit more drama, like the kind of slip knot that gets tighter the more one struggles to break free of it ... heading higher or lower.

So while rising prices reduce demand, they also increase the incentive for the creation of more supply, and raise the bar on which kinds of projects can be considered affordable. However, the converse is that as price falls, and improves the fortunes of individuals, companies, and even the mighty US balance of payments, falling prices reduce the incentives for new development, and make nonsense out of previously sensible projects. Meaning, lower supply in the future and ... here we go again !!! Neil King of the Journal gives a good summation today here.

As Oil Prices Fall ... No Sleeping This Time

The price of oil goes up and down (see previous post on oil price yo-yo), we've seen it all before. Now, with a monster storm named Ike barreling its way through the Gulf of Mexico threatening a significant percentage of US refining capacity, oil's current downward trends are hardly affected by the risk.

Yet as this article points out, this would be a particularly bad time to get complacent on energy security. Many humans seem to prefer reactive vs. proactive thinking. Me, I always prefer making tough decisions when I'm not in crisis mode, and oil dropping back to and through $100, from a late 2008 point of view, seems to be a gift. An unexpected bit of breathing room. Highly recommend DOD not waste it. Peak oil means we'll be back to $150 oil and beyond before we know it.

Peak Oil Chart of EIA

Put Your Head Between Your Knees - another Volley of Oil Volatility is Underway

Call it a yo-yo (I have many times), or a roller coaster (to better convey the anxiety), but whatever terms you use, oil is on the verge of doubling in price since reaching the 30's a few months ago. This link to a recent Mckinsey report on oil futures requires a paid membership. This article from the Times of London's Liam Halligan is free, and does as good a job as any at laying out many of the moving parts that make forecasting the price of a barrel of oil a ridiculous, though necessary, undertaking.

The Economist and Tom Barnett on UAV Revolution

Nice piece in the Economist on past, present and likely future of UAVs or "drones". Pace of innovation and energy-related technological advance reminds me of the 1980's PC era:

Small drones ... with electric motors are quiet enough for low-altitude spying. But batteries and fuel cells have only recently become light enough to open up a large market. A fuel cell developed by AMI Adaptive Materials, based in Ann Arbor, Michigan, exemplifies the progress made. Three years ago AMI sold a 25-watt fuel cell weighing two kilograms. Today its fuel cell is 25% lighter and provides eight times as much power. This won AMI a $500,000 prize from the Department of Defence. Its fuel cells, costing about $12,000 each, now propel small drones.

And here are Barnett's take-aways:

• No personnel lost and drones deliver great results at about 1/20th the cost of jets
• Benefit is the loitering capacity ("persistent stare" means yo can find needles in haystacks because you can watch them being built) yielding real-time operational intell
• In 2003, the big UAVs logged 35k hours in Iraq and Afghanistan. Last year the number was 800,000 hours. That total doesn't even include all the new, super-small robotic ones that guys just launch by throwing them in the air; the U.S. military has something like 5,000 such units. That's a revolution, my friends

And his prediction: "the big UAVs are getting up in the tens of millions of dollars per unit, but the smaller ones stay in the tens of thousands of dollars. Guess which ones will win out over time?"

For me, UAVs and their land-based and under-sea autonomous and semi-autonomous cousins have got to be one of the most exciting product families to work on in a long time. And the implications of their arrival and eventual ubiquity are, for DOD energy demand planners, presently unfathomable. Eyes wide open on this space.

Photo: Wikimedia