Autoline on Autoblog with John McElroy
by John McElroy on Dec 14th 2007 at 2:24PM 
John McElroy is host of the TV program "Autoline Detroit". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
WHEN THE OIL BUBBLE BREAKS
In 1995, way back in the days of print, I was doing research for the 100th anniversary of a magazine called Automotive Industries. It actually started out in 1895 as a magazine called The Horseless Age, a much more romantic name for a publication, don't you think? It was fascinating to go through all of the back issues and watch how the auto industry evolved literally each time I turned a page.
In the course of my research I started to notice a pattern. Starting in the late 1920s, the magazine ran an article warning that we were running out of oil. And once a decade or so after that there would be another article, written by a different editor, interviewing a different expert who predicted essentially the same thing--that we'd be running out of oil in the next 15 to 20 years.
That got me into looking at the historical price of gasoline in this country, and the data is illuminating (click here to see gas prices since 1919). The price of gasoline plummeted after WWI. It soared in the late 1930s as war broke out in Europe and Asia. Then it slid for nearly thirty years after WWII. In the 1970s, two oil crises pushed the cost of gasoline to all-time highs. And that was followed by a collapse in prices. As recently as 1999, the price of oil was only $17 a barrel! Today, of course, the price is soaring again.
But the point is: the history of oil shows a big run-up in prices every two to three decades followed by a collapse. And what are we in today? A big run-up in prices. Do you see where I'm going with this?
There's no question that demand for oil is pushing up prices. China, India and other developing nations are as thirsty for this stuff as we are. But increasing demand is not what made the price soar. That was the terrorist attacks of 9/11, the war in Iraq, the attempt to blow up Saudi Arabia's largest pumping station, the confrontations with Iran, political troubles in Angola, and the billions of dollars speculators are pouring into oil market futures.
Clearly it's the war, political unrest and speculation that primarily pushed the price up nearly five-fold in only seven years. History shows that won't last.
At a time when so many are worried about the impact of high oil prices on the auto industry, I'm worried about the opposite effect. What if, just as the industry is pouring billions into hybrids, clean diesels, fuel cells and other fuel-saving technologies to meet a 35 mpg CAFE by 2020, the price of oil slides back down to, say, $30 a barrel? Will consumers happily pay for this costly technology if gasoline suddenly drops to $1.50 a gallon in the US?
I'm not talking about this happening anytime soon. I figure it'll take about a decade for prices to settle down again. But in automotive terms, that's only two design cycles away.
I know, I know, everyone tells me the price of oil will never, ever go down to $30 a barrel again, not even if you adjust it for future inflation. They all give me a bemused smile that says, "This guy's off his rocker!"
But I point to history. It's on my side.
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WHEN THE OIL BUBBLE BREAKS
In 1995, way back in the days of print, I was doing research for the 100th anniversary of a magazine called Automotive Industries. It actually started out in 1895 as a magazine called The Horseless Age, a much more romantic name for a publication, don't you think? It was fascinating to go through all of the back issues and watch how the auto industry evolved literally each time I turned a page.In the course of my research I started to notice a pattern. Starting in the late 1920s, the magazine ran an article warning that we were running out of oil. And once a decade or so after that there would be another article, written by a different editor, interviewing a different expert who predicted essentially the same thing--that we'd be running out of oil in the next 15 to 20 years.
That got me into looking at the historical price of gasoline in this country, and the data is illuminating (click here to see gas prices since 1919). The price of gasoline plummeted after WWI. It soared in the late 1930s as war broke out in Europe and Asia. Then it slid for nearly thirty years after WWII. In the 1970s, two oil crises pushed the cost of gasoline to all-time highs. And that was followed by a collapse in prices. As recently as 1999, the price of oil was only $17 a barrel! Today, of course, the price is soaring again.
But the point is: the history of oil shows a big run-up in prices every two to three decades followed by a collapse. And what are we in today? A big run-up in prices. Do you see where I'm going with this?
There's no question that demand for oil is pushing up prices. China, India and other developing nations are as thirsty for this stuff as we are. But increasing demand is not what made the price soar. That was the terrorist attacks of 9/11, the war in Iraq, the attempt to blow up Saudi Arabia's largest pumping station, the confrontations with Iran, political troubles in Angola, and the billions of dollars speculators are pouring into oil market futures.
Clearly it's the war, political unrest and speculation that primarily pushed the price up nearly five-fold in only seven years. History shows that won't last.
At a time when so many are worried about the impact of high oil prices on the auto industry, I'm worried about the opposite effect. What if, just as the industry is pouring billions into hybrids, clean diesels, fuel cells and other fuel-saving technologies to meet a 35 mpg CAFE by 2020, the price of oil slides back down to, say, $30 a barrel? Will consumers happily pay for this costly technology if gasoline suddenly drops to $1.50 a gallon in the US?
I'm not talking about this happening anytime soon. I figure it'll take about a decade for prices to settle down again. But in automotive terms, that's only two design cycles away.
I know, I know, everyone tells me the price of oil will never, ever go down to $30 a barrel again, not even if you adjust it for future inflation. They all give me a bemused smile that says, "This guy's off his rocker!"
But I point to history. It's on my side.
###
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Airs every Sunday at 7:00AM on Speed and 10:30AM on Detroit Public Television.
Last Week's Episode: "I, Robot - Part 2"
Autoline Detroit Podcast
Click here to subscribe in iTunes
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Reader Comments (Page 1 of 2)
Shipey 2:34PM (12/14/2007)
/agree
Reply
nissanfreak87 2:53PM (12/14/2007)
even if it doesn't go down, and we do run out, there's a simple answer...whale oil!!
This is a great article! very good info that I didn't know (early oil crisis stuff)
Reply
tariq 3:20AM (12/18/2007)
whales are an endangered species
nissanfreak87 10:54AM (12/18/2007)
only some are, and do you really think I was being serious?
Nicholas 2:45PM (12/14/2007)
Past results are not indicative of future results... Let's see. A finite number of dinosaurs died. In the meantime, since the last oil price trough, 2 billion more people have been entering the moneyed world and the global demand for cars is going through the roof. Our ability to find oil is now far better than it ever has been and we are at the point of drilling under the north pole to get at it. There are not many places after that to go look. Places that are in contention such as ANWR contain less than a year's supply for the United States. The only hope I have is the saying, "The stone age did not end for lack of stones." I am hopeful that some magical physics hocus pocus will actually come to fruition and end the oil age before we actually do run out, because the prospects of a global war for those scant resources is going to suck tremendously.
Reply
Andrew 2:55PM (12/14/2007)
Exactly. This isn't an endless commodity with a sin graph for price fluctuation. Whether there's 1 billion or 3 trillion barrels left, the stuff will run out.
tariq 3:20AM (12/18/2007)
yes oil WILL end one day. john mcelroy did not deny that. but he says that the prices might fall again before it ends out. and ofcourse when the last drops are being used, prices will be higher than we hav ever experiances before
dan spalinger 2:55PM (12/14/2007)
First of all...oil doesn't come from decayed dinosaurs despite what your nursery school teacher told you...
Secondly...if John's premise is correct (and I believe that it essentially is) that Oil prices are inherently cyclical at this point with our ever increasing capacity to find and exploit oil deposits offset by an ever growing population and appetite for oil, the REAL question here that John doesn't ask is this: If the price of oil is not driven by supply/demand and is instead driven by rational/irrational fears regarding our own safety and the safety of accessing such oil networks that do exist, do we see a DECREASE in the overall instability of the 2nd and 3rd world nations in which most of the current oil networks currently exist? I would say no...as these 2nd and 3rd world nations try to claw their way out of the stone age they are becoming less, not more stable...Therefore I would propose that John's initial assertion--that Oil prices are cyclical and not directly tied to its supply at this point--is correct...But that his conclusion--that Oil prices will display a marked and prolonged decline inside of a 10 year period--is not.
Reply
Andrew 2:57PM (12/14/2007)
Agreed on your middle east point, though we going to hit the oil peak, and the sad thing is, we won't know it.
Chris 3:02PM (12/14/2007)
This whole article is riddled with logical fallacies.
Reply
Papercutninja 3:09PM (12/14/2007)
Care to point them out instead of making blanket statements?
Tom 3:05PM (12/14/2007)
What about refinery capacity? My understanding right now is that we're maxed on out this and no-one's building new ones. This article doesn't address any serious issues.
Reply
Luis 3:17PM (12/14/2007)
Interesting article. I don't agree that people will return to fossil-fuel only cars if the price of crude drops. If anything they'll be happier those who own hybrids) that the price to operate their vehicles is even less. I also do not think gas prices are ever coming down again to years gone by prices. In my experience, after a price hike the price levels off, but it never goes below the hike again.
Reply
Nellydesign 3:32PM (12/14/2007)
Maybe not as much in actual dollars, but in inflation adjusted dollars, the price does drop way below the hiked price.
Luis 3:35PM (12/14/2007)
@Nellydesign: I understand your argument; unfortunately, real dollars are the ones that fill the tank...thanks for the comment.
hoeun kim 6:44PM (12/14/2007)
but you have to consider what that real dollar would have bought you relative to what it would buy now. any monetary amounts not adjusted for inflation does not make a solid argument of anything. its the value of each dollar, not how many dollars. if apple can be bought for 10 cents 50 years ago, that same 10 cents wont buy you same amt of apple today. so you have to normalize the amt of dollars with inflation to get a correct value of the dollar.
seoultrain 3:32PM (12/14/2007)
There are too many oil/global warming-related articles out in the internet. They all say different things, and cite equally differing facts as to whether or not we're doomed for armageddon. Personally, I think there is simply too much money to be made on both sides of the argument to totally buy into either side. The only certainty is that the US government will screw everything up related to this topic. So there is my non-opinion opinion.
Reply
Yggdrasilly 3:53PM (12/14/2007)
Actually, India and China have been industrializing to an extent and at a rate never seen before in the history of either nation. I can't see how this would NOT affect the price of oil, and in fact that is what many "price hawks" think IS driving the current price of oil.
I'm not saying there isn't a geopolitical component as well, but is it entirely responsible for the recent run-up in oil prices? I don't think so: demand is going up and supply is not keeping pace.
Reply
SherbornSean 4:13PM (12/14/2007)
Any economist worth his salt will tell you that the real price of commodities tends to fall over time. Oil is a commodity, with viable substitutes that will become more favored when oil prices are high.
Reply
Michael 5:11PM (12/14/2007)
I agree. The "peak oil" idea (that it's running out in x years) is just economically illogical ... while it is true that some finite amount has to exist, that amount depends on many factors, how deep to drill, how 'pure' the crude is, how much refining has to be done, etc etc.
The Alberta Oil Sands are an excellent example - before they weren't even considered an oil 'reserve' in the traditional sense - because while billions of barrels are in the field, they could never extract the oil from the bitumen. But today, those fields have become economically viable (because the price of oil makes it so) and are now included in estimates of future reserve.
And as the price continues to rise (and that is likely a temporary trend, due to the war, etc.) more and more oil fields that were previously thought to be unusable will become viable and profitable.