Another fact based, non-ideological analysis by Gail Tverberg that shoots multiple holes in the bullshit Energy Independence storyline being perpetuated by the MSM and politicians in both parties. As you’ve seen in recent posts, we are using significantly less oil today than we were in 2006 because we’ve been in an ongoing recession. And still the price of oil is over $95 per barrel and rising. This is happening despite the “miracle” of shale oil in North Dakota. Americans are so myopic and self centered, they don’t grasp that our oil usage has become meaningless in the pricing of oil. India, China and the rest of the developing world are driving the ship with their huge demand increase.
Oil is a fungible product and will be sold to the highest bidder. Accessing the remaining oil grows more expensive by the day. Our progressing recession may provide a brief respite in gasoline price increases, but there is absolutely no doubt that prices will exceed $5 per gallon in the next few years. When you understand the implications of Gail’s article you will understand why we keep getting our military involved in Iraq, Libya, Algeria and the rest of the Middle East. Visit her site on a regular basis to understand our true energy situation:
Ten Reasons Why High Oil Prices are a Problem
A person might think from looking at news reports that our oil problems are gone, but oil prices are still high.
Figure 1. US crude oil prices (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.
In fact, the new “tight oil” sources of oil which are supposed to grow in supply are still expensive to extract. If we expect to have more tight oil and more oil from other unconventional sources, we need to expect to continue to have high oil prices. The new oil may help supply somewhat, but the high cost of extraction is not likely to go away.
Why are high oil prices a problem?
1. It is not just oil prices that rise. The cost of food rises as well, partly because oil is used in many ways in growing and transporting food and partly because of the competition from biofuels for land, sending land prices up. The cost of shipping goods of all types rises, since oil is used in nearly all methods of transports. The cost of materials that are made from oil, such as asphalt and chemical products, also rises.
If the cost of oil rises, it tends to raise the cost of other fossil fuels. The cost of natural gas extraction tends to rises, since oil is used in natural gas drilling and in transporting water for fracking. Because of an over-supply of natural gas in the US, its sales price is temporarily less than the cost of production. This is not a sustainable situation. Higher oil costs also tend to raise the cost of transporting coal to the destination where it is used.
Figure 2. US Energy Prices as % of Wages and as of GDP. Ratio to GDP provided by EIA Short Term Economic Outlook – Figure 27, converted to Wage Base by author, using same wages as described for Figure 3.
Figure 2 shows total energy costs as a percentage of two different bases: GDP and Wages.1 These costs are still near their high point in 2008, relative to these bases. Because oil is the largest source of energy, and the highest priced, it represents the majority of energy costs. GDP is the usual base of comparison, but I have chosen to show a comparison to wages as well. I do this because even if an increase in costs takes place in the government or business sector of the economy, most of the higher costs will eventually have to be paid for by individuals, through higher taxes or higher prices on goods or services.
2. High oil prices don’t go away, except in recession.
We extracted the easiest (and cheapest) to extract oil first. Even oil company executives say, “The easy oil is gone.” The oil that is available now tends to be expensive to extract because it is deep under the sea, or near the North Pole, or needs to be “fracked,” or is thick like paste, and needs to be melted. We haven’t discovered cheaper substitutes, either, even though we have been looking for years.
In fact, there is good reason to believe that the cost of oil extraction will continue to rise faster than the rate of inflation, because we are hitting a situation of “diminishing returns”. There is evidence that world oil production costs are increasing at about 9% per year (7% after backing about the effect of inflation). Oil prices paid by consumers will need to keep pace, if we expect increased extraction to take place. There is even evidence that sweet sports are extracted first in Bakken tight oil, causing the cost of this extraction to rise as well.
3. Salaries don’t increase to offset rising oil prices.
Most of us know from personal experience that salaries don’t rise with rising oil prices.
In fact, as oil prices have risen since 2000, wage growth has increasingly lagged GDP growth. Figure 3 shows the ratio of wages (using the same definition as in Figure 2) to GDP.
Figure 3. Wage Base (defined as sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.
If salaries don’t rise, and prices of many types of goods and services do, something has to “give”. This disparity seems to be the reason for the continuing economic discomfort experienced in the past several years. For many consumers, the only solution is a long-term cut back in discretionary spending.
4. Spikes in oil prices tend to be associated with recessions.
Economist James Hamilton has shown that 10 out of the last 11 US recessions were associated with oil price spikes.
When oil prices rise, consumers tend to cut back on discretionary spending, so as to have enough money for basics, such as food and gasoline for commuting. These cut-backs in spending lead to lay-offs in discretionary sectors of the economy, such as vacation travel and visits to restaurants. The lay-offs in these sectors lead to more cutbacks in spending, and to more debt defaults.
5. High oil prices don’t “recycle” well through the economy.
Theoretically, high oil prices might lead to more employment in the oil sector, and more purchases by these employees. In practice, this provides only a very partial offset to higher price. The oil sector is not a big employer, although with rising oil extraction costs and more US drilling, it is getting to be a larger employer. Oil importing countries find that much of their expenditures must go abroad. Even if these expenditures are recycled back as more US debt, this is not the same as more US salaries. Also, the United States government is reaching debt limits.
Even within oil exporting countries, high oil prices don’t necessarily recycle to other citizens well. A recent study shows that 2011 food price spikes helped trigger the Arab Spring. Since higher food prices are closely related to higher oil prices (and occurred at the same time), this is an example of poor recycling. As populations rise, the need to keep big populations properly fed and otherwise cared for gets to be more of an issue. Countries with high populations relative to exports, such as Iran, Nigeria, Russia, Sudan, and Venezuela would seem to have the most difficulty in providing needed goods to citizens.
6. Housing prices are adversely affected by high oil prices.
If a person is required to pay more for oil, food, and delivered goods of all sorts, less will be left over for discretionary spending. Buying a new home is one such type of discretionary expenditure.
US housing prices started to drop in mid 2006, according to data of the S&P Case Shiller home price index. This timing fits in well with when oil prices began to rise, based on Figure 1.
7. Business profitability is adversely affected by high oil prices.
Some businesses in discretionary sectors may close their doors completely. Others may lay off workers to get supply and demand back into balance.
8. The impact of high oil prices doesn’t “go away”.
Citizens’ discretionary income is permanently lower. Businesses that close when oil prices rise generally don’t re-open. In some cases, businesses that close may be replaced by companies in China or India, with lower operating costs. These lower operating costs indirectly reflect the fact that the companies use less oil, and the fact that their workers can be paid less, because the workers use less oil. This is a part of the reason why US employment levels remain low, and why we don’t see a big bounce-back in growth after the Great Recession. Figure 4 below shows the big shifts in oil consumption that have taken place.
Figure 4. Percentage growth in oil consumption between 2006 and 2011, based on BP’s 2012 Statistical Review of World Energy.
A major part of the “fix” for high oil prices that does takes place is provided by the government. This takes the place in the form of unemployment benefits, stimulus programs, and artificially low interest rates.
Efficiency changes may provide some mitigation, as older less fuel-efficient cars are replaced with more fuel-efficient cars. Of course, if the more fuel-efficient cars are more expensive, part of the savings to consumers will be lost because of higher monthly payments for the replacement vehicles.
9. Government finances are especially affected by high oil prices.
With higher unemployment rates, governments are faced with paying more unemployment benefits and making more stimulus payments. If there have been many debt defaults (because of more unemployment or because of falling home prices), the government may also need to bail out banks. At the same time, taxes collected from citizens are lower, because of lower employment. A major reason (but not the only reason) for today’s debt problems of the governments of large oil importers, such as US, Japan, and much of Europe, is high oil prices.
Governments are also affected by the high cost of replacing infrastructure that was built when oil prices were much lower. For example, the cost of replacing asphalt roads is much higher. So is the cost of replacing bridges and buried underground pipelines. The only way these costs can be reduced is by doing less–going back to gravel roads, for example.
10. Higher oil prices reflect a need to focus a disproportionate share of investment and resource use inside the oil sector. This makes it increasingly difficult maintain growth within the oil sector, and acts to reduce growth rates outside the oil sector.
There is a close tie between energy consumption and economic activity because nearly all economic activity requires the use of some type of energy besides human labor. Oil is the single largest source of energy, and the most expensive. When we look at GDP growth for the world, it is closely aligned with growth in oil consumption and growth in energy consumption in general. In fact, changes in oil and energy growth seem to precede GDP growth, as might be expected if oil and energy use are a cause of world economic growth.
Figure 5. Growth in World GDP, energy consumption, and oil consumption. GDP growth is based on USDA International Macroeconomic Data. Oil consumption and energy consumption growth are based on BP’s 2012 Statistical Review of World Energy.
The current situation of needing increasing amounts of resources to extract oil is sometimes referred to one of declining Energy Return on Energy Invested (EROEI). Multiple problems are associated with declining EROEI, when cost levels are already high:
(a) It becomes increasingly difficult to keep scaling up oil industry investment because of limits on debt availability, when heavy investment is made up front, and returns are many years away. As an example, Petrobas in Brazil is running into this limit. Some US oil and gas producers are reaching debt limits as well.
(b) Greater use of oil within the industry leaves less for other sectors of the economy. Oil production has not been rising very quickly in recent years (Figure 6 below), so even a small increase by the industry can reduce net availability of oil to society. Some of this additional oil use is difficult to avoid. For example, if oil is located in a remote area, employees frequently need to live at great distance from the site and commute using oil-based means of transport.
Figure 6. World crude oil production (including condensate) based primarily on US Energy Information Administration data, with trend lines fitted by the author.
(c) Declining EROEI puts pressure on other limited resources as well. For example, there can be water limits, when fracking is used, leading to conflicts with other use, such as agricultural use of water. Pollution can become an increasingly large problem as well.
(d) High oil investment cost can be expected to slow down new investment, and keep oil supply from rising as fast world demand rises. To the extent that oil is necessary for economic growth, this slowdown will tend to constrain growth in other economic sectors.
Airline Industry as an Example of Impacts on Discretionary Industries
High oil prices can be expected to cause discretionary sectors to shrink back in size. In many respects, the airline industry is the “canary in the coal mine,” showing how discretionary sectors can be forced to shrink.
In the case of commercial air lines, when oil prices are high, consumers have less money to spend on vacation travel, so demand for airline tickets falls. At the same time, the price of fuel to operate airplanes rises, making the cost of operating airplanes higher. Business travel is less affected, but still is affected to some extent, because some long-distance business travel is discretionary.
Airlines respond by consolidating and cutting back in whatever ways they can. Salaries of pilots and stewardesses are reduced. Pension plans are scaled back. New more fuel-efficient aircraft are purchased, and less fuel-efficient aircraft are phased out. Less profitable routes are closed. The industry still experiences bankruptcy after bankruptcy, and merger after merger. If oil prices stabilize for a while, this process stabilizes a bit, but doesn’t really stop. Eventually, the commercial airline industry may shrink to such an extent that necessary business flights become difficult.
There are many discretionary sectors besides the airline industry waiting in the wings to shrink. While oil prices have been high for several years, their effects have not yet been fully incorporated into discretionary sectors. This is the case because governments have been able to use deficit spending and artificially low interest rates to shield consumers from the “real” impacts of high-priced oil.
Governments are now finding that debt cannot be ramped up indefinitely. As taxes need to be raised and benefits decreased, and as interest rates are forced higher, consumers will again see discretionary income squeezed. New cutbacks are likely to hit additional discretionary sectors, such as restaurants, the “arts,” higher education, and medicine for the elderly.
It would be very helpful if new unconventional oil developments would fix the problem of high-cost oil, but it is difficult to see how they will. They are high-cost to develop and slow to ramp up. Governments are in such poor financial condition that they need taxes from wherever they can get them–revenue of oil and gas operators is a likely target. To the extent that unconventional oil and gas production does ramp up, my expectation is that it will be too little, too late, and too high-priced.
Note:
[1] Wages include private and government wages, proprietors’ income, and taxes paid by employers on behalf of employees. They do not include transfer payments, such as Social Security.
sangell says:
I understand the frustration of the renewable energy acolytes and investors and those who want Peak OIl Now! but the fact is America’s oil and gas industry is about the only positive thing going on in our economy it probably saved Obama and the Demcrats politically along with a mild winter last year.
Anyone remember where gas prices were after Katrina? $13 and 14 per thousand cubic feet. Not in 2012 dollars but 2005 dollars. People could not afford to heat their homes. Municipal utilities could not get long term gas contracts. Natural gas was in short supply. On cold days we had trouble keeping pressure up in our system. We had to interrupt service to industrial users to keep residential gas flowing. We’d add propane to keep the system from going tits up. This was during ‘good times’ economically.
Now we have a surfeit of natural gas. Home heating costs have plunged handing millions of consumers a windfall of $100/month or more in winter. Natural gas was too expensive to use for electricity generation other than in peaking plants but at under $4 per 1000 cu. ft it is cheaper to burn than $100/ton coal. To me this is a bad thing because natural gas is really too valuable a fuel to be used for base load electric power generation and sub $4 gas is not a stable price but that’s the jackpot the oil and gas industry handed Obama and the US in 2012/13. You might think Obama would show some appreciation for this fortuitous development but then that would take class and this psuedo president is strictly a declasse kind of guy.
The other side of this shale and drilling revolution is the increase in our oil production. Every dollar not spent on imported oil is a dollar added to American GDP. 500,000 barrels plus of additional US oil production has done more to bolster the US economy than anything that skinny negro in the White House has come up with and yes, it does reduce domestic oil prices because, fungible or not, oil still has to shipped and transporting a barrel of Saudi crude to our GOM refineries is not cheap. We also reduce our total import needs in a tight world market for crude.
There are other benefits. Oil and Gas E&P requires steel pipe for the wells and pipelines that move the production. Steel plants are expanding in the US to meet this new demand. Our energy price advantage in both fossil fuels and per kilowatt are drawing manufacturing back to the US. The German chemical industry is throwing in the towel. They can’t beat American chemical company prices.
It may not be able to overcome the stupidity of Washington but our oil and gas companies deserve a hallaleujah for doing what Americans used to be famous for, hard work and innovation to find a way to solve a problem. The half caste mongrel in the White House ought to try it some time instead of flapping his purple gums and wasting taxpayer money on solar boon doggles.
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19th January 2013 at 1:20 pm
wip says:
Admin,
Sorry to change the topic.
What are your monthly costs to run this blog? Who do you host with?
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19th January 2013 at 1:58 pm
Administrator says:
wip
I use Bluehost. I pay annual fees of about $400 to Bluehost, WordPress and Go Daddy to run the blog.
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19th January 2013 at 2:02 pm
Administrator says:
Sangell
I don’t dispute that the technology breakthrough that has led to us accessing natural gas and oil from fracking has been beneficial to our economy, but it is not going to make the country energy independent. We still import 10 million barrels of oil per day. The shale oil wells deplete much more rapidly than traditional wells and cost dramatically more to drill.
Producers have a breakeven cost of $6 for natural gas fracking. This is why the price of natural gas has risen 40% in the last year. Producers have closed up operations until the price reaches $6. No business is going to purposely operate at a loss.
That is the point of the article. We aren’t running out of oil and gas. It is just much more expensive to access than it did 30 years ago. Prices will continue to rise over the long-term.
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19th January 2013 at 2:20 pm
wip says:
Is that $400 or $1200 total?
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19th January 2013 at 2:21 pm
Administrator says:
$400 total
I don’t have any bells and whistles. I can’t afford them.
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19th January 2013 at 2:23 pm
bosto says:
Sangell, do you work for DOE or an oil co? Producers were frackin & drillin when NG was 40% less than now, and they still are. Yeah, these wells deplete “faster & cost more” (be specific), but break-even is still cheap compared to that overpriced stuff we import. BTW, I see where “peak oil” has disappeared from Big Oil’s lexicon these days.
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19th January 2013 at 2:52 pm
wip says:
You can’t afford it? Even with all those online Doom and GloomXmas sales?
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19th January 2013 at 2:54 pm
Administrator says:
Those are paying for my TBP estate in the Cayman Islands. I just travel the 30 Blocks of Squalor every day for the stories.
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19th January 2013 at 2:58 pm
bosto says:
Oops, I meant to address my comment to Admin, and not Sangell. Sorry.
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19th January 2013 at 3:00 pm
Administrator says:
bosto
Are you a clueless shill that doesn’t understand math?
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19th January 2013 at 3:00 pm
Ron says:
I think NG should be mandatory for new pickup trucks.Also NG filling stations should be built at gas stations.Im curious what happened to hydrogen? it was touted as the next great thing for fueling cars.
Im not all up about OPEC.Would the usa be better off if we kept all production here? Is there enough oil here?
Ive read that if our military was thrown into the equation that gasoline is really about 14 bucks a gallon.
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19th January 2013 at 3:07 pm
crazyivan says:
The Oil Drum is alike TBP in that it is forum for people who can listen only then, they don’t fling monkeyshit at each other in obvious glee. They tend to be a little stoic. I don’t think that a “blow me” would even be answered there. For some reason these people are capable of intellectual discussion and deal mostly in facts.
That being said, I obviously have to state that they are doing it wrong.
I can’t remember when I actually stumbled across TOD, whether it was before Mancondo, or very shortly afterword , but I do remember the absolute takeover of their website by the followers of the submersible robots and CRAW the manmade huge lobster craw lowerd to the site via cables among much cheering to sever the exposed pipe above the blowout valve. It was days of much fun watching this via submersible video of questionable authanticity.. And the big dogs at TOD mostly did little to curb the bullshit.
6 months later TOD was back to normal.
They are a good bunch on The Oil Drum. It’s kind of like us, only they are nerds.
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19th January 2013 at 5:47 pm
SSS says:
“I don’t have any bells and whistles (on the TBP website). I can’t afford them.”
—-Admin
This from a guy who drives a different Ferrari to work every day (he has five) and takes Avalon to NYC every weekend and stays at the Waldorf-Astoria Presidential Suite.
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19th January 2013 at 6:21 pm
Administrator says:
Two of my Ferraris
Paid off 9 years ago
Paid off in 2 months
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19th January 2013 at 8:09 pm
Llpoh says:
Admin borrows to pay for a car! The horror! The horror!
Must be gaming the system as it does not sound like him.
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19th January 2013 at 8:23 pm
Administrator says:
North Dakota shale oil will deplete faster than Alaskan oil. Every oil well experiences the same production curve. Every one.
What the ideologues can’t get through their thick skulls is that for every new source of oil found, the existing wells are depleting faster. And every new source of oil found requires twice the cost to extract than those that are depleting.
But keep clinging to your delusions if they allow you to sleep at night.
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19th January 2013 at 8:32 pm
Administrator says:
Mexico is going to become a net importer of oil in the next few years.
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19th January 2013 at 8:35 pm
Administrator says:
Norway North Sea oil production
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19th January 2013 at 8:43 pm
sangell says:
True oil will likely become more expensive but $4/gallon in my Titan is like $10/gallon gas in your Insight. I can get rid of my truck and pay $10/gallon and buy an Insight and my gas expense does not increase in terms of dollars per mile. Only my ability to ego will suffer as I no longer will be able to stare down at people in puny cars and enjoy the view from on high.
The other flaw is we don’t know how much oil is available in countries with state oil companies. I can assure you if you let Exxon or BP loose in Iraq, Iran or Saudi Arabia they would be able to increase output by a huge amount. In the case of Iraq probably quadruple it. It will deplete of course but we don’t know over what time frame because western oil companies are not free to assess oil reserves in much of the world. At $150 to $200/barrel US recoverable oil would also grow. The technology to get at previously unrecoverable oil is growing. In the UK they plan on using waste CO2 from a coal plant to force oil from exhausted North Sea fields. A twofer if it works!
We aren’t going to be short of oil in the near term. Prices may hold at $100 or even higher but, as I’ve pointed out that is not crippling given the improvement in vehicle mileage. Fuel as a portion of total operating costs for a car is lower today than 50 years ago at current prices.
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19th January 2013 at 9:05 pm
Administrator says:
llpoh
0.9% for three years. I paid about $150 in interest.
The cash I didn’t put out three years ago was used to buy silver and gold. I did a little better than 0.9% on that investment.
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19th January 2013 at 9:09 pm
Administrator says:
Sangell
All of the countries in the Middle East have overstated their reserves because OPEC quotas have been set by total reserves. Saudi Arabia is lying about their reserves.
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19th January 2013 at 9:12 pm
Administrator says:
For anyone wanting the truth about North Dakota and Texas Shale Oil read this extremely detailed article:
http://www.theoildrum.com/node/9748#more
KEY POINTS YOU WON’T HEAR IN THE MSM:
Findings from this in-depth study of time series for production from some individual wells:
• Presently the estimated breakeven price for the “average” well in the Bakken formation in North Dakota is $80 – $90/Bbl In plain language this means that presently the commercial profitability for new wells is barely positive.
• The “average” well now yields around 85 000 Bbls during the first 12 months of production and then experiences a year over year decline of 40% (+/-) 2%
• The recent trend for newer “average” wells is one of a perceptible decline in well productivity (lower yields)
• As of 2007 and also as of recent months, the total production of shale oil from Bakken, has shown exceptional growth and the (relatively high) specific average productivity (expressed as Bbls/day/well) has been sustained by starting up flow from an accelerating number of new wells
• Now and based upon present observed trends for principally well productivity and crude oil futures (WTI), it is challenging to find support for the idea that total production of shale oil from the Bakken formation will move much above present levels of 0.6 – 0.7 Mb/d on an annual basis.
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19th January 2013 at 9:15 pm
Administrator says:
Sangell
Look at these MIRACULOUS oil reserve increases when OPEC decided to set their quotas by highest to lowest oil reserves. There were no new discoveries that led to these “adjustments”.
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19th January 2013 at 9:19 pm
Llpoh says:
Admin – I figured.
I usually bargain for a car based on “I will be financing” because they make money on the finance so often give a better price for folks who finance. Then at the last minute I write them a check. They do not likee, but too bad for them. I also say I will trade a car, which they value low, so often drop the price some more knowing that they will make some there, too. But then I do not trade the car, but sell it via a friend in the wholesale business, where we split his margins, so good for around ten percent more on my trade in. All in all I tend to make a fair bit playing their system against them. Final thing is I tell them I will service car with them, which is where they really make their money, which cuts a few more dollars off.
And I am always ready to walk out. Never buy a car on emotion. That costs heaps.
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19th January 2013 at 9:22 pm
Administrator says:
Sangell
Look at the chart in the article. Energy as a percentage of wages is at an all time high. That is what matters. Stagnant wages and higher energy costs are a deadly combination. It was 10% in 1999. Today it is 16%. In a few years it will be 20%.
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19th January 2013 at 9:24 pm
Administrator says:
llpoh
They were flabbergasted when I put 20% down and financed it over 3 years when I could have financed over 6 years.
It will be nice having an additional $471 per month of cash flow after it is paid off. No car payment for another 7 years for me.
If I can only convince Avalon to drive the 13 year old minivan for another 7 years, we’ll be in good shape. I got the damn air conditioner fixed for her last year.
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19th January 2013 at 9:29 pm
sangell says:
Selecting 1999 when oil prices were very low is statistical manipulation but I don’t doubt that with incomes shrinking for much of the population oil prices will cause them problems but that also makes the decline in natural gas prices in the US a lifesaver for Obama. People can voluntarily reduce their oil consumption ( unless the still heat with the stuff) because you can share rides or just drive less but if you can’t afford to heat your home in winter that’s a life threatening situation.
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19th January 2013 at 9:41 pm
AWD says:
Admin popped for a new Honda? And took out a loan? He’s always been talking about his ancient SUV, he’s been fooling us all.
His wallet was as shocked as Avalon
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19th January 2013 at 10:02 pm
Administrator says:
AWD
I bought the Honda three years ago. It already has 53,000 miles on it.
My oldest son has the CRV up to 195,000 miles.
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19th January 2013 at 10:06 pm
AWD says:
You forgot the “blow me”
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19th January 2013 at 10:08 pm
Llpoh says:
Admin is a man after my own heart. I drove a twenty year old clunker even when I was a senior manager, until I got into a position to pay cash outright if I wanted a new car. Fuck car payments.
When you right them a check for the full amount their jaws drop and their eyes bug out, and they try to talk you out of it.
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19th January 2013 at 10:11 pm
Administrator says:
I’m in a good mood.
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19th January 2013 at 10:12 pm
AWD says:
Both my cars are paid for, one is 8 years old, the other 6 years old.
Cars are a pretty damn big expense, and the taxes. Screw the government, I’m not buying a car until those fall apart.
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19th January 2013 at 10:14 pm
sangell says:
It made sense to finance a car before ZIRP it may still. Back in 1998 I bought a Toyota when they were offfering 4 years at 0%. Was I going to pull $15000 from the bank earning 4% or take Toyota’s offer. Even now, if you can get a 0% financing deal why not. A car is a depreciating asset ( ok so is fiat but car depreciate faster). Why use your money to finance if the manufacturer will use their’s?
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19th January 2013 at 10:31 pm
Maddie's Mom says:
Don’t do it, Avalon.
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19th January 2013 at 10:51 pm
SSS says:
“0.9% for three years. I paid about $150 in interest.”
—-Admin commenting about purchashing his Honda Insight
What a schmuck. The little woman and I just paid off a three-year loan on a Toyota Camry XLE, with all the bells and whistles, at ZERO % interest. And that was with everything included and a heavily discounted car to boot. Taxes, tags, registration, everything. Smokin’ deal we got when there was a lot of false, bad press about Toyota models having accelerator problems.
It’s all about timing. Admin gets stiffed for 150 bucks. I get to enjoy 2 really nice dinners out with the little lady, and Avalon gets stuck at home fixing dinner for a cranky husband.
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19th January 2013 at 12:11 am
Administrator says:
sangell
It’s even better. The American taxpayer is financing the car at 0% for six years through Ally Financial, which is still 85% owned by the government.
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19th January 2013 at 9:40 am
Administrator says:
SSS loses again.
Admin has saved $4,000 in fuel costs over three years versus his CRV because his Honda Insight gets 45 mpg.
The $4,000 was invested in CEF, generating another $1,000 of appreciation.
Avalon still has to make dinner at home for a cranky Admin.
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19th January 2013 at 11:13 am
Administrator says:
SSS doing 15 mph on a 6 lane interstate in his souped up Camry.
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19th January 2013 at 11:16 am
Administrator says:
Why senior citizens like SSS should be required to pass a driving test. This was after shooting a 137.
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19th January 2013 at 11:18 am
sangell says:
Sangell’s next auto fleet, Drill baby Drill
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19th January 2013 at 11:41 am
Eddie says:
It took me many years to get to a point where I could pay cash for a car to avoid interest charges, and then they immediately change the game by offering 0% financing on damn near any car available. Pisses me off.
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19th January 2013 at 12:07 pm
SSS says:
Admin and Eddie
The Camry has a 270 hp V-6 and can really scoot. 0-60 in less than 6 seconds plus 30 mpg highwway, 24 city on regular 87 octane gas. Not too shabby.
Took the cash we could have paid for the car, kicked in a bit more, and bought a non-taxable muni bond fund that has returned $9,000 in the three years we were making interest-free payments on the car. Just got the title to the car. Not too shabby.
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19th January 2013 at 12:26 pm
Eddie says:
Disclosure:
I am buying two Toyotas at 0% interest for my kids. Buying used cars for college no longer makes sense, imho.
I took the money I would have paid for the two cars, made a down payment on a 50 stall boat storage facility, which I also financed at low fixed interest for ten years, and it flowed about 10K in cash the first year. It will do better if I can get it leased out fully. I think that’s pretty good ROI, but I don’t know nuthin about finance.
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19th January 2013 at 12:43 pm
Chicago999444 says:
To those of you who buy your kids cars:
Why not save even more money and make the little buggers take public transit?
Jeez, do people ever spoil their kids these days. Just think how much fuel we’d save if we just raised the driving age to 18 nationwide-never mind teen lives. Car wrecks are the biggest killer of teenagers.
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19th January 2013 at 1:06 pm
Eddie says:
Chicago
I am a great believer in public transit. However, the citizens of my home state are largely clueless about the benefits. Here in Austin there has been a long term initiative being fought over light rail, and it generally is thought of by most folks as a pork barrel project and another waste of tax dollars.
Texans love their cars like they love their guns. I buy cars for my kids because they are a complete and utter necessity here. And having checked on sending my kids to out of state schools (like your DePaul University, for instance, where public transit is available) I can definitely say that keeping them in-state and buying the cars is financially better for my pocketbook.
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19th January 2013 at 2:29 pm
Rick says:
In 1996 I financed a brand new Toyota RAV4. Drove it 193k miles (83k of those after fixing myself it when my wife rear-ended a moving van). Sold it in 2010 for $2750 and bought a 2010 Toyota Venza, 4-cyl, that gets up to 30mpg on the highway. Got a great deal on the purchase price, and last fall the dealer sent me a letter offering to buy it back for $2k more than I bought it for. I was floored but didn’t take them up on the offer, mostly because they cost more now and I’m very satisfied with the car.
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19th January 2013 at 8:24 pm
Administrator says:
Guest Post:Gregor Macdonald: What The End Of Cheap Oil Means
Submitted by Tyler Durden on 01/20/2013 21:54 -0500
Via Adam Taggart of Peak Prosperity,
On the heels of Chris’ recent report clarifying the global net energy predicament, he and PeakProsperity.com contributing editor Gregor Macdonald sit down to talk in depth about the broken relationship between energy costs and economic growth.
For much of the twentieth century, the developed world saw a steady march upwards in wages and living standards, due primarily to huge quantities of cheap, high-yielding liquid hydrocarbon. As we find ourselves bumping along the plateau of Peak Oil’s apex, suddenly we find that “growth” is a lot harder to come by.
Of course, if you follow the news today, this is not the story you are hearing. Talk of an energy bonanza and imminent energy independence (in the U.S.) are everywhere, thanks to gas fracking and tight oil production. What is missing from the headlines is the cost side of the equation and a blindness towards future demand.
For certain, shale gas will be a boon for the U.S. and some other countries. But very little is transported these days by gas, and there are no mega-sized infrastructure projects underway to change that anytime soon. Extraction of new tight oil plays is increasing production, but not by enough to offset other field declines elsewhere in the world, and not at the prices we were used to over the past century. The era of cheap oil is over, and these higher permanent prices act as a boot on the throat of economic growth. Hence the mired global economy we have been experiencing in recent years.
Rather than fooling ourselves with fanciful “energy independence” pablum, we should be looking hard at what kind of future we want to have now that oil is no longer cheap. And we should be asking ourselves in regards to the remaining fossil fuels we’re extracting: How can we put these non-renewable BTUs to their best use, before they become expensive, too?
I think the main conversation we are not having is that wages are very unlikely to ever return to a relationship to energy costs that would make the United States economy into a happy economic story once again. In other words, this whole idea that we will restore that unique relationship of high wages and low energy prices — that is what we are not dealing with. So by telling ourselves the story that we are producing more energy, you can clearly see the cultural impulse there. The cultural impulse is there is to suggest “See? There is a chance, there is a chance we can get the energy cost down again and then there is a chance that that wages will come up again. That relationship got very skewed and kicked into a nasty bad place over the past decade. That is very much a way of thinking about what our economic story is, why we had the crisis, and why this supposed emergence from the crisis that we have been plodding our way through the past several years, why it feels so dis-satisfactory, why it feels so insufficient in many respects.
This goes back to the Industrial Revolution. What caused a revolution in British wages? The appearance of coal in the British economy. Why is that? Because not only did you have human workers making stuff, but also, now you had coal helping you make stuff. Coal was the slave labor that you did not have to feed or shelter or clothe or house. And you could get coal to work for you and you could work for you, and you put it all together and it becomes high wages, and you get to pocket those high wages.
So this is the dream that we once enjoyed, here in the States with our cheap oil and our high wages. And since oil became less cheap, the wages have stagnated, and I just do not see how we are ever going to get back to that relationship again. Maybe we will talk about this; I do have some hope that we could stabilize the relationship in a future world, which is more weighted towards the power grid in which some manufacturing returns to the United States. But I think the main thing is – you asked the question, what is the main thing we are avoiding? We are avoiding the very painful prospect – likelihood – that we will not be able to return to high wages, low prices, cheap energy.
As you point out, one of the cruel things that we left in the wake of our higher rate of growth and our cheap energy era and our high wage era was the debt. We left a tremendous amount of debt. Of course there is the public debt, but I really think what has been governing the economy in the post-crisis era has been the intractable nature of the private debt. We have both done work on charting the course of the private debt and I am sure we would agree that there has been some deleveraging that has occurred, but it is not nearly the amount of deleveraging that the media either thinks or wishes has occurred.
When you compare private debt levels to assets in the United States, yes, we are off the peak, but we are only back to 2006 levels. Most of the people I know were worried about debt levels in 2006. So to “deleverage” back to 2006 levels is not an achievement.
This promise of greater energy supply is obviously dangling out the prospect that somehow that will translate into cheaper prices and that the debt can be serviced and possible extinguished or deleveraged. But as we are finding the process is grindingly slow, and that is a big reason why the economy is grindingly slow and just does not seem to make much progress.
These things can work for a short period in the short term, and that is what we have been doing in the last five to seven years. We have been adding either expensive or marginal sources to the liquid fuel supply, as you know. This process can be thought of as one where the older more cheap oil is continually swapped out for the more expensive, unconventional, more expensive oil, and that makes for some sort of new risks when it comes to how the global economy may slow or speed up and what it may do to oil prices.
Because what I think we are going to find, especially in resource plays like the tight oil resource plays: if price goes below what it is costing these companies to extract this oil, it is actually going to be quite easy for these companies to simply stop drilling; to just stop adding additional wells. Because if you look at the actual mechanics by which wells are currently being added, they are added on a highly discretionary basis. They go in, they produce a lot of oil for a short period of time, and then they go into steep decline.
I think what people do not understand is that the Bakken is not like a traditional oil field where you are developing the whole field at one time; you are really just sticking little pin pricks into the topography of the western Dakotas. It is not like a tar sands operation, in which you sink all of the steel in the ground first over a five- to six-year engineering project and then you try to get paid back for the steel that you sunk in the ground. This is more of an inch-by-inch incremental project in the Bakken.
So what it looks to me is if price goes below sufficient levels – and I currently put that if price goes below $80-$75 a barrel for any length of time – we will just lose supply much more quickly. I just do not think the market or the economy or Wall Street has gotten its head around the fact that a good chunk of our supply now is ready to go offline at the moment that price drops. And that is probably why price has been so sustainably high, because the global futures market for oil realizes that oil that you see now costs a lot more so it is not going to willing to sell you oil two years from now at $70 or $75 a barrel. It knows that the only way that $70 or $75 a barrel oil is available two years from now is if we are back into a deep recession. I mean a deep recession.
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19th January 2013 at 8:38 am
Eddie says:
Few people get the connection between cheap energy and their standard of living. If anybody in government gets this, it’s the world’s most highly guarded secret.
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19th January 2013 at 9:40 am
Administrator says:
Eddie
I think those in government actually do get it. That is why we come up with reasons to go to war in Iraq, Iran and Algeria. Their countries happen to be on top of our oil.
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19th January 2013 at 9:47 am
ThePessimisticChemist says:
@Chicago – There is no public transportation where I live.
Most of us started driving on our own at age 12.
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19th January 2013 at 10:02 am
Eddie says:
Obviously, some people at the highest level understand it very well, like the Bildenbergers and their ilk. The Dick Cheneys of the world get it. But I’m not sure Congress gets it.
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19th January 2013 at 10:09 am
Bruce says:
Admin,
Using the average well of 85000 BO first year paints a nice picture. The MSM and many financial sources refer to all the production from the area as from the widely deposed Bakken Shale, The high producing wells that contribute to the 85000 BO figure mainly come from dolomite sandwiched between shale formations. It can be prolific if you hit a sweet spot. Dolomite is porous and permeable with often very high recovery percentages of oil in place.
However this dolomite is thinly deposed, difficult to locate with precession and must be drilled sideways at great expense to be the most effective. It covers a miniscule productive area with in the giant Bakken formation. With out the production of these non shale wells the average production of actual shale wells would simply suck big time. The widely deposed shale is not very profitable for investors only for the oil companies promoting the deals. Most shale production regardless if it has added significant production to the US totals is produced at a loss to those payed for the wells to be drilled. Take for example the Barnett Shale in north Texas. It was all the rage for dumbass investors. Investors who made even half their money back on those wells are as rare as lottery winners. It’s not just the Bakken or Barnett it’s most all shale plays. I’d say the vast majority of all wells drilled in the USA that are productive produce at a loss to investors or those who bare the costs to drill. Few wells are financed by the oil company’s themselves. Its been this way since the early days of the oil industry. Shale is one of the shittyist types of rock to get hydrocarbon out of but has been promoted to dupes for ages because it’s easy to find in widely dispersed areas and looks like a sure hit. And it is. Then reality sucks.
Shale production for both oil and gas will prove very disappointing for most all those who have not been burned yet as it always has. There is always a new “angle” or new “technology” that will get that oil or gas out of the shale. It never profitably has and never will. When you see the MSM, Wall Street and securities dealers hawking a new formation or a new oil and gas technology get ready to be rat fucked big time. Shale oil will never get us close to oil independence. Never
My old partner is up there right now. He has the backing from some investment bank in New York that finance his crappy wells one after another. He’s wants to hit that dolomite just right but it’s not easy even for a real oil finding son of a bitch.
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19th January 2013 at 10:57 am
Administrator says:
Bruce
I love when someone who knows about this shit posts the reality of the situation.
My first thought on the Bakkan shale oil was that the easier to access highest producing areas are being tapped first. It will only be downhill from here.
The article I linked to concludes that they will never get production much past 700,000 barrels per day. We would need 10 million barrels per day to become energy independent.
The lies from the MSM and government agencies are revolting.
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19th January 2013 at 11:07 am
ThePessimisticChemist says:
People are looking for a silver bullet to America’s energy problem, however its not going to happen. The days of easy energy are gone and until we all accept the fact that life is not fair, we’ll never be able to find a solution.
A few things to help on our way to energy independence:
1) Cellulosic Ethanol, specifically using switch grass and corn stover. (probably 10-15% of current gasoline usage at BEST)
2) Biogas (3-5% of natural gas needs)
3) Biodiesel – I don’t have the numbers for this one. I sincerely doubt its more than 5% of diesel needs.
Runners up: More fission reactors, hydrogen fuel cells, allowing the cost of energy to climb upwards forcing people to scale back on the number of big screens running in their house, thorium reactors
Long term potential: Efficient hydrogen “cracking” from water. Fusion reactors. Solar panels that are actually worth it without the government paying for it.
Pipedream: Converting politician promises into reality.
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19th January 2013 at 11:46 am