Oil, oil, toil and trouble . . .

A couple of years ago, it seemed as if I couldn't escape from oil prices. Oil would hit a new high, and I would buckle down to another piece explaining why this was happening. The culprits were always the same: Chinese demand, apparent American insensitivity to gasoline prices, and a worrying inability on OPEC's part to open the taps. But there was always the new price record to talk about. How high could it go?

It seems odd, then, that the current price situation is so little remarked. Oil prices just topped $80 a barrel before sinking backwards, which is a record in nominal terms. This is still not up to the real record, which occurred during the Iran crises, when oil prices briefly touched about $100 a barrel in today's dollars. But we journalists have been repeating that mantra since oil was at $50, and it's getting thinner as we grow towards that mythical target.

For environmentalists, and those of us who would like to see a carbon tax, this is good news: oil markets are doing our work for us. On the other hand, it's not clear how long this will last. To be sure, Saudi Arabia's biggest oil field may be beginning to falter, other key producers such as Nigeria, Iraq, and Iran are having security problems. In Venezuela, Hugo Chavez, who is sitting atop a gigantic reserve of crude so heavy and sulphurous that until recently it wasn't even classed as oil, is doing his best to make sure that that crude never comes out of the ground by diverting investment funds to social spending. And the areas we exploited last time, such as the North Sea, are pretty fully developed now.

But of course, the current state of oil prices generally looks permanent until it's not; witness my former employer's famous forecast of $5 a barrel oil. Demand could collapse, either through recession or because people push for greater efficiency. Saudi Arabia cannot be happy to hear of Americans switching to more fuel-efficient cars. And exploration could ramp up. Venezuela is not the only country with "non-traditional" oil reserves; my understanding is that oil shale and tar sands are cost-effective to exploit at well under current prices. The main thing holding oil companies back is the fear that current prices may not last.

Comments

For environmentalists, and those of us who would like to see a carbon tax, this is good news: oil markets are doing our work for us. On the other hand, it's not clear how long this will last.

On the other other hand, it's not clear how the markets are doing anything at all to improve the enviroment. High prices are just a signal of aggregate demand outstripping supply and a method to allocate the good among individuals with different elasticities. In no way is a higher market price a cause rather than an effect of slower use of oil, and the amount consumed, not its price, is what matters from an enviromental standpoint.

Posted by Dylan | September 14, 2007 11:23 AM

Put differently, if there wasn't a market would we somehow be consuming more oil than we are now? Of course not, outside of a few basket case oil producers with massive domestic subsidies. I doubt, however, that Nigerian, Iranian, or Indonesian consumption is a material cause of growth in CO2 emissions.

Posted by Dylan | September 14, 2007 11:32 AM

For environmentalists, and those of us who would like to see a carbon tax, this is good news: oil markets are doing our work for us.

Sort of. Except that what we pay at the pump goes to Chavez or Ahmadinejad. With a carbon tax we could cut other tax rates, or at least cut the deficit.

Posted by remus | September 14, 2007 11:37 AM

Dylan - Re: "In no way is a higher market price a cause rather than an effect of slower use of oil"

Not true. In fact higher oil prices are not an effect of slower use of oil. Slower use of oil would cause lower prices, unless the use goes down so much and for so long that a lot of oil supply and infrastructure is taken out of service. A higher market price causes people to consume less, and causes supply to go up. With oil these changes happen slowly (esp. new supply) but it still does happen.

Posted by Tim Fowler | September 14, 2007 1:57 PM

Exploration is currently going on in the Gulf of Mexico and offshore of Brazil. I've designed equipment going onto rigs in both places. Deepwater drilling rigs are being built like crazy. Based on my own company's orders, several dozen are being built. And that's only going to be a portion of the total. A rig rated at 10,000 feet is able to drill in much of the ocean. The average ocean depth is around 12,000 feet. Rigs rated at 15,000 feet are not that far off and could probably dill throughout most of the ocean, barring trenches.

A good chunk of the Gulf of Mexico is still off-limits to drilling. Offshore California is limited, too, I believe.

Methane hydrates on the ocean floor are a potential source of energy, too. If we are able to recover them safely, they could possibly provide energy for centuries. Though we'll need it to power air conditioners and air purifiers by the time we burn all that methane...

EI

Posted by Earnest Iconoclast | September 14, 2007 2:17 PM

The main thing holding oil companies back is the fear that current prices may not last.

Can I infer that BP, Exxon etc think that we will escape from high oil prices?

It occurs to me to wonder about how a nationalised, politicised oil extraction industry reacts to changes in the oil price. If it falls, would they start making major efforts to increase production, to keep the money to bribe voters coming? And if it rises, will they ease off on investmant to direct that money to political ends?

If a politicised industry reacts "irrationaly" to changes in the price level, that might explain the tendency of the oil price to shoot from one extreme to the other.

Posted by ad | September 14, 2007 3:04 PM

I have a question re: a carbon tax as a way of reducing oil use.

I understand that the purpose of a carbon tax in the U.S. (and/or other countries) would be to reduce our use of fossil fuels, ostensibly to slow global warming (accepting, for argument, AGW is real). Econ 101 teaches us that our reduction in use should produce a reduction in world-wide oil prices. Further, a reduction in world-wide oil prices should produce an increase in world-wide oil demand. Thus, at least some of the reduction in U.S. CO-2 output would be counter-balanced by an increase in other countries.

Is there an economic theory of the interplay between supply, demand, and taxation that suggests the net result is likely to be a reduction in total CO-2 output, rather than a wash?

It seems to me likely that a carbon tax might suffer the same free-rider problem as Kyoto, with those countries that don't enact similar taxes undermining any gains.

Or am I missing something?

Mycin

Posted by Mycin | September 14, 2007 7:04 PM

In the medium and long term the problem isn't so much reducing US consumption - which the forthcoming recession should do nicely - it's holding back the growth in consumption elsewhere, particularly China.

In the short term there are two key drivers for oil prices.

Firstly: oil is not priced in dollars: dollars are priced in oil. The IOU's issued by US Banks and the Fed as money are not "Value" - they are claims over Value issued without limit or restraint.

As US interest rates fall - as they must, in a vain attempt to stave off the inevitable - so will the flow of funds necessary to keep the $ afloat dry up.

We are already seeing the consequence: oil prices are rising more in dollar terms than in other currencies.

Secondly: now that the tidal wave of hedge fund money is washing out of the Mickey Mouse - sorry "Alice in Wonderland" - credit market (insofar as it CAN get out) where is it going to go?

Expect hedge fund and investment bank traders (in searach of this year's bonus) to take massive punts in the energy markets this winter that make Amaranth look like the local garage.

We're in for a rocky ride, and we are going to have to start looking for alternatives to our current - totally unsustainable - monetary system "deficit-based" upon credit created by banks as a multiple of their capital base.

Posted by Chris Cook | September 14, 2007 7:49 PM

It never ceases to amaze me the the remedy for everything is MORE TAX! The writer of this tripe (Megan) is certainly overpaid and under worked. Get into the real world and see the effects of three dollar fuel on the needs of the peasants here in the USA. You should have to hold down several minimum wage jobs and still count coins to pay for gasoline to commute to work. Everyone does not live in an area with public transit as you must. Many years ago the French became fed up with the antics of the higher class and produced a remedy-the guillotine. It seems the peasants in the USA should take a lesson from them.

Posted by William Place | September 14, 2007 8:09 PM

Oil is running out quickly. Sand reserves are too few and too expensive when one counts the environmental costs of digging through Alaska. Exploration has reliably produced fewer and fewer findings over the last decades...

BP knows that. Why else change your name to Beyond Petroleum and become one of the largest photovoltaics producers in the world? Given current technologies and pollution levels - solar is the only ECONOMICAL source of mass energy? Toyota anybody? Bill Gates of China? Wal-Mart's stock price?

In other words - the times to ponder about "oil" have long passed? Unless somebody wants to invest billions in my new CD-ROM start-up?

Posted by Hugo Pottisch | September 14, 2007 9:02 PM

The increasing length of time during which demand has outpaced supply seems to suggest that we really are running out of oil.

What I find especially worrying are The Old Drum posts on the Export Land Model. In a nutshell: Think of the world divided into two spheres: Export Land and Import Land. Export Land is made up of the countries that export oil. Import Land is made up of the countries that import oil.

We face two problems with Export Land:

1) More countries in Export Land peak in production and gradually experience declining production.

2) Demand for oil in Export Land is increasing.

It is the second point that is especially underappreciated. The TOD writers such as Jeffrey Brown (aka westexas) make a pretty strong case for the importance of growing demand in Iran, Russia, Saudi Arabia, and other producers causing a shrink in the oil available for export.

We still have some unknowns. How much oil lies in deep waters such as in the Arctic? How much can be extracted by promising new recovery methods, especially the new method for extracting heavy oil: Toe to Heel Air Injection (THAI).

Posted by Randall Parker | September 15, 2007 11:58 AM

The value of the dollar doesn't have anything to do with oil prices? $50 in 1980 doesn't buy the same thing today. In fact it buys a lot less.

Posted by Joe Klein's conscience | September 15, 2007 9:23 PM

Re William Place's comment -- "It never ceases to amaze me the the remedy for everything is MORE TAX!" -- I invite you to look at our www.carbontax.org website. We propose a revenue-neutral carbon tax, with the proceeds returned via rebates or offsetting reductions in payroll tax. We need to tax pollution and reduce other taxes.

Re Mycin's question -- we are eventually going to need a global carbon tax - such as referred to in Gregory Mankiw's article in today's (Sunday) New York Times business section - or some type of border tax adjustments to protect the U.S. economy and fairly distribute the impact of a carbon tax on other countries.

Posted by Dan | September 16, 2007 1:40 AM

Taxing carbon dioxide and calling it a pollutant when the very lifeforms (Plants, both land and water born) that make vertebrate life possible on the planet use it exclusively for their respiration is ludicrous. When will you start calling for an exhalation tax as we all produce this fearsome material with every breath. This is just another useful ploy to strike fear into the hearts of those ignorant of the facts and realities of life on this planet. If we could collect and harness the heated effluvia from the so called environmentalists and socialists that scream daily about the end of civilization we could all forget about the need for fossil fuels. Please, for the sake of all concerned, find another issue to put your energy into!

Posted by William Place | September 16, 2007 6:17 PM

Nothing like an oil post to bring the nutters out...

Posted by Bob Dobalina | September 16, 2007 6:34 PM

Given current technologies and pollution levels - solar is the only ECONOMICAL source of mass energy? Toyota anybody? Bill Gates of China? Wal-Mart's stock price?

1. You may have never seen a Solar Power Plant. Allow me to describe the few I've seen:

Giant outdoor mirrors are used to focus the sun's rays on a single point, boiling water into vapor. That vapor turns generators as it expands under internal pressure. The heat generated by the mirrors is astounding. Put one anywhere other than a wasteland or desert and any organic material (leaves, grass, trees, a stray bird) in the immediate vicinity will combust, possibly causing a brushfire. Not to mention, these mirrors tend to crack when the temperature changes significantly, requiring costly repairs in any environment with variable climate.

2. Solar tends to fail at the absolute most inopportune times. Imagine making a cross country trip in a solar car. You see a wall cloud up ahead. Your car shuts off, leaving you running through the wind and rain to escape the inevitable tornado.

Too far fetched?

How about this: If Erie, PA gets three straight weeks of snow squalls, every resident will be stuck in their house for those weeks with no power and no heat. How many won't survive?

I don't know enough about the costs of solar power vs. coal to comment (I do know fission costs half of what coal costs and produces zero greenhouse gases), but I do know that solar's not a viable option for mass energy at present. If it was, some forward-thinking soul would be building hundreds of solar plants and making his or herself a billionaire. I know there's some company studying flat, light-weight, cheap photo-voltaic cells, but, since they are not in production, they may as well not exist for the purposes of answering questions pertaining to now.

Wind is more viable, but has a nasty little side effect of bringing about an avian extinction, something I hope no one is prepared to live with.

I think fission plants (with emphasis on recyclability) are our best option in the short term for home and business power generation.

Unfortunately, failing some imminent quantum leap in capacitors (a Human Teleportation sized leap), we're probably stuck with oil for vehicles--more due to shipping requirements than personal transportation requirements.

Since fuel requirements for shipping are basically static, all a gas tax will do is double the price of milk and bread (and any commodity or necessity that can be purchased at a store that doesn't have in-house production). Maybe you can afford that, but I doubt many single mothers would agree.

Posted by Steve | September 16, 2007 7:25 PM

One more thing.

BP knows that. Why else change your name to Beyond Petroleum

Public Relations and Marketing. "British Petroleum" marks BP as a foreign company in an unpopular business.

In other words, Kentucky Fried Chicken didn't change their name to KFC because they thought the age of chicken was long past.

Posted by Steve | September 16, 2007 7:36 PM

At $60 a barrel sustained prices, you can quite profitably use electricity from coal or nuclear power plants to convert coal and water into gasoline and diesel. While that might not be politically tenable in the United States, the Chinese government or the Mexican government or whomever doesn't have to worry about the Sierra Club. And coal is quite plentiful.

So if we're actually running out of oil, we should see at least some of the major oil companies noticing that. In which case they should be making massive investments in building plants that can produce diesel and gasoline from coal. Sure, the plants would lose money if the price of extracted-from-the-ground oil dropped to $30 a barrel, but if we were really running out, there wouldn't be too much risk of that.

Instead, we see them dipping their toes in a bunch of pilot-level programs -- a little Fischer-Tropsch, a little solar, a little shale, a little wind, a little ethanol, a little biodiesel, a little butanol, etc. This pattern indicates they're not really worried about oil. They're just keeping their hand in other technologies, picking up a few patents that might be useful if a breakthrough happens, and using the projects as PR.

Now, it's possible that all the executives of all the oil companies worldwide are total idiots that are ignoring evidence of peak oil. But I'd need some pretty good odds were I to take a bet on that.

Posted by Oildrilling Lunatic | September 16, 2007 10:48 PM

Hi Bob.

Thanks for the vote of confidence.

Regards.

Bill

Posted by William Place | September 17, 2007 1:06 AM

Come on, Mr. Place. If the fact that human beings exhale is *really* your argument against the possibility of the existence of Global Warming, you've got to be prepared to take some flak.

After all, combustion takes place in every human cell, but I'd still like a fire department to handle cases when there's a little more combustion than I'd like.

Posted by Tom West | September 17, 2007 6:52 AM

Steve

1. You may have never seen a Solar Power Plant. Allow me to describe the few I've seen: Giant outdoor mirrors are used to focus the sun's rays on a single point, boiling water into vapor. That vapor turns generators as it expands under internal pressure. The heat generated by the mirrors is astounding. Put one anywhere other than a wasteland or desert and any organic material (leaves, grass, trees, a stray bird) in the immediate vicinity will combust, possibly causing a brushfire. Not to mention, these mirrors tend to crack when the temperature changes significantly, requiring costly repairs in any environment with variable climate.

Obviously – you are among those humans who assume that everybody on the planet except themselves is intellectually challenged? What are you describing above? Boiling water into vapor which then turns generators... I am talking about photovoltaic modules and not hydro- or steam-power... Modern PV cells do NOT look like mirrors. Many are black (and cannot even be recognized from other roof-tiles) and do not reflect the light but rather absorb it. They are build in such a way that they do not give out heat but conserve and invert it. Otherwise it would not work. Thin Film Solar can look like tanned glass – it is see through and can be integrated into walls of buildings, etc.

2. Solar tends to fail at the absolute most inopportune times. Imagine making a cross country trip in a solar car. You see a wall cloud up ahead. Your car shuts off, leaving you running through the wind and rain to escape the inevitable tornado.

WRONG! Solar works during the most inopportune times the best compared to all other energy sources. The most inopportune time in the energy sector is “peak time” (11h-15h) or when most black-outs happen. This is when more energy is being consumed than during the rest of the day combined. Since the sun is the strongest during exactly this time – solar can cover peak requirements cheaper and more reliable than other energy sources. Nuclear or fusion energy would be produced remotely – then be transported to the city where the grid would distribute it to the consumers.. that is nasty! For only 3 hours of peak consumption the transportation and grid infrastructure must be able to handle 5 times the load of the remaining 21 hours.. The only reason why energy prices are rather low in the US is because the private sector didn’t dare to make improvements as they would have to be passed on to the consumer bills.. Now – building new nuclear and fusion plants (which is expensive as old ones must be replaced first which takes decades) would require not only repairs of ailing networks but also major enhancements.. Plus – there are 10 times more points-of-failures with most alternatives to solar. The difference is between a mainframe and the internet..

And in any case. The idea is NOT that you have a power plant in your car. Your electric car would have fuel cells that can store energy like old-school cars stored coal, wood and nowadays oil.

How about this: If Erie, PA gets three straight weeks of snow squalls, every resident will be stuck in their house for those weeks with no power and no heat. How many won't survive?

Yes – and if they do not store food during winter they will perish too? Point?

I don't know enough about the costs of solar power vs. coal to comment (I do know fission costs half of what coal costs and produces zero greenhouse gases), but I do know that solar's not a viable option for mass energy at present. If it was, some forward-thinking soul would be building hundreds of solar plants and making his or herself a billionaire.

That is what I meant by: Bill Gates of China, WalMart’s stock, etc.. where do you live Steve. Have you not read a financial paper once over the last 1-2 years? What stocks are growing faster than during the internet bubble? Which sector has produced the most new billion bucks IPOs and millionaires? Sometime – I am not certain if you are taking the piss or not? Will the solar revolution happen like the Information Technology revolution..? The few geeks in Silicon Valley make 10 times more money than all the bankers in NY combined and after 25 years the bankers wake up and all become VCs of an industry that is coming to an end?
YES – solar power is economical when compared to all other energy sources today (see my link above)– even without the subsidies that ALL other energy sources (like oil, nuclear, gas, coal) get.. either directly or indirectly via the nontransparent transportation and grid-costs or through strange financing of fusion plants (billions over a decade with major delays in most cases..). It is therefore economical today because at this stage it can help with the peak load.. over the years – as solar becomes even more efficient – it can cover even more than the peak load. We are facing huge opportunity cost for not having at least 20% of our energy production from solar today! The Germans, Japanese and Spanish are currently rocking the boat...

The US missed out on some great business when she slept through the wireless revolution. Nokia, Erickson, Sony, Sharp, Sanyo.. etc. The solar revolution is too important to be missed and I know that California is awake (as so often!)

Wind is more viable, but has a nasty little side effect of bringing about an avian extinction, something I hope no one is prepared to live with.

Wind could barely cover the world’s energy needs with today’s technologies whereas solar can cover 5 times the needs with current levels. Wind is cheaper to set up.. but it has to happen remotely because it is simply too “loud” for residential areas. Due to that the energy has to be transported and this in turn destroys the economics and the introduces a single-point-of-failure. 2% of the German area would be enough with current solar technologies to cover 100% of demand. But even if you covered all of Germany with wind – you would only get 50% of current demand!

I think fission plants (with emphasis on recyclability) are our best option in the short term for home and business power generation.

I did some consulting work for the IAEA recently where we were hosting a meeting with Los Alamos and CERN… I cannot go into details but let me say: FORGET nuclear and fusion.. those times have long passed.. centralized mainframe style single point of BS??? It is too slow, too expensive, too unreliable too everything… Last week’s Economist had a lead article on the “new age of nuclear”.. please do not listen to these people except when they discuss economics!! Those people keep claiming that China’s inflation will bring the country down and that the price of oil will fall and that we will find more oil reserves and what not... they are like parents who claim that jazz and rock will never take off because..

Public Relations and Marketing. "British Petroleum" marks BP as a foreign company in an unpopular business. In other words, Kentucky Fried Chicken didn't change their name to KFC because they thought the age of chicken was long past.

The point of the name change is that they call themselves “Beyond our core product” AND have become a top 3 solar OEM! I am not aware that KFC does that? Or does it stand for Kinky Fresh Chocolate now and is investing in organic, fair-trade Coca plantations in South America instead of factory farms?

Posted by Hugo Pottisch | September 17, 2007 9:54 AM

Hi Tom.

Please read the post until you understand it and reply again.

Regards.

Bill

Posted by William Place | September 17, 2007 6:46 PM

Wow, excitable much?

What are you describing above? Boiling water into vapor which then turns generators... I am talking about photovoltaic modules and not hydro- or steam-power... Modern PV cells do NOT look like mirrors

I wasn't talking about photovoltaic arrays. Photovoltaic arrays don't produce as much power as the mirror arrangement described, so you have to build more of them at greater cost per unit.

Furthermore, I'm unclear if you're arguing that everyone buy his or her own arrays for his or herself, making powerplants outdated. That sounds like a great long term strategy that's presently useless unless you can convince people to start putting PV arrays not only on the roof, but where the swingset used to be in the back yard.

Solar works during the most inopportune times the best compared to all other energy sources. The most inopportune time in the energy sector is “peak time” (11h-15h) or when most black-outs happen...over the years – as solar becomes even more efficient – it can cover even more than the peak load. We are facing huge opportunity cost for not having at least 20% of our energy production from solar today! The Germans, Japanese and Spanish are currently rocking the boat...

While I could go through and itemize every problem with everything you've said, here, this extract best exemplifies the first problem I have with your angry response: you keep talking about things that are beside any point I've raised.

I bring up weather and you start talking about time of day, then bizarrely suggest that being stuck without power, at home, in a blackout during freezing weather is somehow the fault of the people who are stuck!

I say if solar were currently viable someone would be building solar plants everywhere and you respond by pointing out that A, B and C are all studying Solar. I didn't say studying. I said building.

An even bigger problem is you insist that X is the future without explaining how that helps now.

There are two current energy crises:

1)That potentially hostile and unstable countries like Saudi Arabia, Iran, Iraq, etc. are primary oil producers and could wreck US economy, if inclined, is a reality now. This situation is forever going to involve us in asymmetrical wars with primitive tribes as long as oil control by dark agers exists.

2) Climate change is on the verge of being a catastrophic problem now.

Someday capacitors will exist that can power tractor trailers for 18 hours a day. That day will not be soon. Tractor trailers can only run on oil or diesel. What do we do until that day?

Someday you will be able to drive an electric car into a filling station and have the battery recharged in the same amount of time as it takes to fill up a gas tank. That day will not be soon. What do we do now?

Someday solar energy can replace coal power plants. But climate change is already here and you concede that solar cannot replace coal at present.

Someday solar energy will be cheaper and more effective than it is. Someday it will be more useful than fission. Why split an atom when you can simply build what amount to a bunch of perpetual motion devices? But it's not cheaper or more effective now and won't be soon.

Everyone's on the same page as for how energy should be supplied when the technology exists in twenty-five or fifty or a hundred years.

That doesn't help us with energy crisis 1 or energy crisis 2 and we can't just fast forward through those years as you seem to want to do.

These problems exist now, and saying that when we invent X or perfect Y, we won't have them anymore doesn't address what needs to be done about them today.

Posted by Steve who lives in a barn and hasn't read a financial paper in 1-2 years, etc. etc. | September 19, 2007 3:14 PM