Why did oil prices spike, and then drop so quickly? Will it happen again?

The unprecedented rise in oil price over the last few years, then followed by the even more dramatic crash in oil prices we have more recently experienced has certainly been an roller coaster ride for us energy-enthusiasts.

Figures From The Economics of Volatile Oil Prices at The Oil Drum.

The first thing to note in the above figure is that global oil production (crude, shown with the orange line and on the left axis) was climbing quite steadily until 2004. Then, for some reason, amidst a period relatively high economic activity (ah, the good times, remember them?), oil production has plateaued. Up until 2004, prices were pretty stable (blue, right axis). Then, prices started to spike. What is interesting is how these two events coincided. This is the tightening of the supply-demand spread.

Why did the price spike exponentially? And why did it drop so dramatically? At the Oil Drum, one of the contributors prepared a chart of Oil Price versus total global oil product. The chart below shows it all:Global Crude Oil Production Versus Oil Price / Barrel

Basically, the world hit the oil production wall - somewhere around 74 million barrels of crude a day. As we approached our maximum potential global oil production, the price spiked - it went vertical! This also explains why the price collapsed so quickly. When demand dropped off because of global slowdown (caused by high oil prices, see my previous post on this topic), we slid left a bit on this chart, and the prices plummeted. This explains it: as we reach total global output, the price goes exponential, as demand slacks a bit from peak global output, the price crashes. This is illustrated a bit more graphically below (from the same article):

Future Spikes / Crashing into the Wall

So, will we spike again? YES- and sooner. Because of declining total production capacity (exacerbated by the current lack of investment in oil development give poor economic climate), our maximum global oil production (or peak) is dropping. As such, the WALL of maximum production is moving down (or left on the graph). So, we will run into it sooner next time demand starts to grow. And this will continue to move down, causing more price spiking, and we move past 50% total global production of oil.

Insulation anyone?


FOLLOWUP NOTE: Oh, by the way, Non-OPEC (e.g. the rest of the world) has been confirmed as passing peak production in 2004.

Increasing the Durability of Building Constructions

The other day I was reading some criticism of LEED for Homes and the building durability section of LEED-H, which lead me to probably the best resource / guideline I've seen on practical building durability. It is publisehd by Building Science Corporation:

Increasing the Durability of Building Constructions

One interesting this is the discussion of life-span of various building components, and therefore the serviceability / replaceability of said component. For example, if you have a 100-year design life for a house, but windows only have a 20-year life, then we should be taking design measures to facilitate easy replacement of windows - because they are going to get replaced 5 times of the life of that building.

If you are interested in building durability and building sustainability, then buidling science.com should be defiantly on your reading / resource bookmark list. They have lots of great, practical building science articles, papers and discussions.

CIBC World Markets' January Report on the Next Oil Price Spike

CIBC World Markets' January Report has a good article by Jeff Rubin (their chief strategist) on the predicted next oil price spike, including a good discussion of the current affect of low oil costs reducing investment in new development coupled with global oil field decline rates.

CIBC WM predicts oil price to return to $100/bbl by end of 2010 (ie. next year).

Basement Insulation Upgrade for Post-War Bungalow

My brother is currently adding insulation (2" EPS foam) of to the basement walls of his 1 1/2-story post-war bungalow. I was curious to see the effectiveness of this common approach versus building an R60 wall inside the basement, similar to Yukon Housing Corp.'s "SuperGreen" method.

The house is a well-cared for 1 1/2 story bungalow, very common to Whitehorse, especially in Riverdale. The house has some new windows, modest air sealing, and an un-insulated concrete basement with concrete floor. To estimate the energy savings of the two upgrade options, I built a basic model of this house in HOT2000.

Then, ran the two basement insulation scenarios:

1. 2" Foam - 2" EPS foam, taped seams, 1x4 strapping & drywall - R10
2. SuperGreen wall - 2x4 inner stud wall on 1x4 top & bottom plates creating a 16" cavity filled with cellulose. Vapour barrier and drywall - R60

Energy Saving Results:

Basement Insulation Upgrade:	Base Case	2" Foam	SuperGreen
R-Value of Basement	~ R3.5	R10	R60
Total Building Heat Loss (MJ)	116.4	106.6	103.3
Basement Heat Loss (MJ)	34	20.9	24.2
% of Heat Loss through Basement	29%	22.7%	20.3%
Annual Oil Use (L)	2766 L	2452 L	2346 L
Annual Cost Savings @ $1.00/L	-	$314.00	$ 420.00
Annual Cost Savings @ $1.50/L	-	$471.00	$ 630.00

Note: This does not include re-insulation of the rim joist, which would likely be foamed, resulting in reduced overall air-leakage. I assume this would be common to both scenarios, so didn't model rim joist re-insulation upgrade.

Costs:

Assuming the home-owner supplies the labour for both upgrades, material costs are as follows. Costs common to both options (e.g. drywall) are not shown.

Dimensions are:
W: 28', L: 24', H: 7.5', Perimeter: 104' , Wall Area: 780 sq. ft.

Option 1 Material Costs: 2" Foam

Item	#	Unit	Unit Cost	Item Total
2" Foam Board	54	2x8 boards	$ 32.49	$ 1,754
Foam-Concrete Glue	8	tubes	$ 6.00	$ 48
Hilti gun rental	2	days	$ 30.00	$ 60
Hilti nails	3	boxes	$ 60.00	$ 180
Tuck Tape	2	rolls	$ 14.00	$ 28
Acoustical sealant	2	tubes	$ 3.00	$ 6
1x4 16' strapping	33	ea.	$ 5.27	$ 174
Total Material Costs				$ 2,250

Option 2 Material Costs: SuperGreen

Item	#	Unit	Unit Cost	Item Total
Top & bottom plates	13	1x4 16' stapping	$ 5.27	$ 68
Studs	52	2x4 8'	$ 3.77	$ 196
Accustical sealant	4	tubes	$ 6.00	$ 24
Hilti gun rental	1	days	$ 30.00	$ 30
Hilti nails	1	boxes	$ 60.00	$ 60
Tuck Tape	1	rolls	$ 14.00	$ 14
Vapour Barrier	1.5	100' roll	$ 80.99	$ 121
Cellulose Insulation	70	bags	$ 17.97	$1,258
Total Material Costs				$1,772

Summary
If you can "afford" to loose 16" around the perimeter of your basement, then insulating with the SuperGreen method is the way to go:

Upgrade Option:	2" Foam	SuperGreen	Relative Savings
Material Cost	$ 2,250	$ 1,772	$ 478
Oil Savings (L)	314	420	106
Cost Savings @ $1.00/L	$ 314	$ 420	$ 106
Cost Savings @ $1.50/L	$ 471	$ 630	$ 159
Simple Payback @ $1.00/L (years)	7	4	3
Simple Payback @ $1.50/L (years)	5	3	2
Return on Investment @ $1.00/L	14%	24%	10%
Return on Investment @ $1.50/L	21%	36%	15%