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Countdown to 100$ oil (16)

by asdf Fri Nov 18th, 2005 at 09:19:09 PM EST

(Updated, following polite suggestion by Jerome, who could have just deleted the diary.)

I'll probably get whumped for hijacking this title, but here's a current reading on the price of oil. Ironically, Jerome's first 100$ oil diary was in June.

At this point, just entering winter--when the risk is high because of the unpredictability of upcoming demand--oil futures are at the lowest since early summer.

"In London on Friday, the price of Brent North Sea crude for January delivery eased also by nine cents to 54.76 dollars per barrel."
[AFP/Netscape News]

Trend? Or just a brief dip before the real crisis hits?

ANSWER is below!

Ok, so this was not a well-planned diary. I was just sitting here lamenting about how when the price goes up there are lots of diaries about it, and when it goes down, the new "100$ oil" diary rate seems to fall. Let me fill in with my thoughts on the subject.

There is still a LOT of oil in the ground, and the price is controlled primarily by the big suppliers who are governments, mostly in the Middle East. If they decide that the price of oil should be $60 a barrel, they can keep it that way for a long time. Perhaps more than ten years. The basic cost of extraction is still only loosely related to the price.

As a result, predictions of what the price will be can't be based on fundamentals like supply, which is hard enough to gauge, since nobody really knows what's going on in the big oil fields, even not the governments. To make a prediction one would have to know the future thoughts of the officials that set the prices. If there is a price war, it could go down--and stay there for a decade. If they manage to set up another successful cartel, it could go up to $200 tomorrow.

And, further, during the remaining decade or two of relatively cheap oil, the technology that drives other energy sources will continue to improve. This will drive down the fundamental price of those alternatives, and they will soon be at par with oil. At that point the supply curve steepens and the price tends to stabilize.

If you're willing to broaden the definition a bit from "100$ oil" to "100$ oil-equivalent energy" then my estimate would be "never." There could be short-term spikes due to wars or poorly planned regulatory situations, but the long term price of energy will stay under 100$.

A point was made recently that oil is a very dense energy storage medium, which makes it the most practical way to make a car or airplane. This is true, although batteries are getting closer and will probably soon be practical for cars. As for airplanes, they can be replaced by trains, which are more efficient anyway for distances up to about 1000 km.

I suggested teleconferencing home to Mom at Christmas, and was completely serious as that's what I plan to do. Most airplane travel is to support businesses, and I can tell you from a lot of personal experience that most of that travel can be cancelled with zero impact on the businesses.

So, the bottom line is that there is no 100$ oil crisis. What we do have is a change in the technology that we will use to generate and store energy, and some related moderate changes in lifestyle. The sky is not falling.

You have been contributing good stuff on this subject too, asdf, thank you. But just for consistency (and any future googling purposes), could I suggest you change your title, so it reflects your own series, and keeps Jerome's series separate? Thanks! (And keep the articles coming...)

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Sat Nov 19th, 2005 at 03:12:53 AM EST
I think we can make one exception.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sat Nov 19th, 2005 at 05:42:55 AM EST
[ Parent ]
It's a bit short for a countdown diary... Only questions, no answers... Come on asdf, stick your neck out a little bit!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Nov 19th, 2005 at 06:16:02 AM EST
[ Parent ]
I think if you check the figures for all successive months (f.e. here), what emerges is that analysts basically have no clue: the price for later delivery basically moves with the front-month price. There is a slight linear increase into the future, that's all.

Repeating my own bet, I tip $60 at the end of the year - because I thought (and feel vindicated by the present lower price) that we'll see the collapse of a speculation bubble atop the supply/demand problems price rise, and then another rise in the winter. I tip that $100 oil is still one or two years away. But the real crisis will be $300 oil - which (if present policies won't change radically) comes at a point I earlier debated with kcurie, who persuaded me to put it at a later date (five-ten years from now).

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sat Nov 19th, 2005 at 05:41:28 AM EST
captures the economics of competing technologies, and the dangers of cartels.  

We recently saw from Chris K how budding entrepreneurs can create incredible solutions to the energy problem.  but this cartel creates an incredible problem for them, and for governments.  Are these entrepreneurs trying to create technologies that compete with a comprilble energy price of $20 per barrel, or with $100 per barrel.  If it's under $50, these guys have wasted 10 years of their lives, and their investors have lost everything.  Somewhere above, may be a winner.

I almost would like to see a diary, or debate, on this, because I think we talk past each other on this point.  I mean, why do you think there is all of these new IT technologies and health care technologies, but nothing really in energy.  

Unfortunately it's complicated, and Jerome, chris k, and asdf try to get to the issues, but as a group, I don't think we are gettin it.

by wchurchill on Sun Nov 20th, 2005 at 01:24:22 AM EST
Thanks for the update and the neck sticking out...
I think you underestimate some points:

  • OPEC has a cartel still has the power to bring prices up (by withholding supply), but no longer to bring prices down (by putting more supply on line) - because they simply do not have the extra supply anymore. Thus Saudi Arabia's position as an "ally" or America able to regulate prices is dead, and OPEC just becomes an adversary. They are desperate to supply more now, for fear that extreme measures will be taken agaisnt them. If they aren't (producing more), it simply means they cannot;

  • oil production prices are increasing - the marginal cost of oil is becoming increasingly expensive, as I diaried back in September (sorry, cannot find the link right now), and new technologies will be more expensive if environmental constraints are properly taken into account. Plus, most of the new technologies will simply not be available in the kinds of volumes we require;

  • I think you also underestimate to what extent our current civilisation depends on cheap and plentiful oil. It's not just cars, it's the whole supply chain (trucks, primarily - harder to put on electric), it's our whole agriculture, it's the way new housing is built (far from city centers, not dense enough to make public transportation viable, without local access to shopping) and the whole car = freedom association.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Nov 21st, 2005 at 05:35:23 AM EST

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