As oil futures hit $115 per barrel late this past week, The Economist ran this article on the questions surrounding the recent announcement regarding the discovery of Brazil’s Carioca-Sugar Loaf Field, which could be one of the largest oil discoveries in history. Given the time, expense and risk involved in extracting the oil, the announcement of the discovery didn’t affect oil markets much, but The Economist article nevertheless concludes as follows:
The discoveries do suggest that the gloomiest pundits are wrong to predict that the world will soon run out of oil. It is not that there are still lots of huge oil fields out there: the number of mammoth discoveries is declining, Tupi (and perhaps Carioca-Sugar Loaf and Jupiter) notwithstanding. But the new finds do illustrate how the technology with which oil firms hunt for, extract and process fossil fuels is constantly improving. Petrobras’s recent success is only possible thanks to recent advancements in seismic surveys, drilling, and offshore platforms. Other technological developments are allowing a greater proportion of the oil found around the world to be recovered and are even expanding the definition of oil, as firms conjure liquid fuel from the solid tar-sands of Canada, for example, or from coal and natural gas.
As noted recently here, the recent increases in oil prices are making alternative energy sources economically viable. Thus, take note of what former ExxonMobil CEO Lee Raymond noted years ago in response to a question on oil prices:
Interviewer: "Some people think prices will keep going up?"
Raymond: "Maybe. I’ll bet they’ll be lower at some point."
Don’t tell Ray Kurzweil that we ought to be all gloomy about the prospects for mankind. This WaPo op-ed reflects that he is downright bullish:
MIT was so advanced in 1965 (the year I entered as a freshman) that it actually had a computer. Housed in its own building, it cost $11 million (in today’s dollars) and was shared by all students and faculty. Four decades later, the computer in your cellphone is a million times smaller, a million times less expensive and a thousand times more powerful. That’s a billion-fold increase in the amount of computation you can buy per dollar.
Yet as powerful as information technology is today, we will make another billion-fold increase in capability (for the same cost) over the next 25 years. That’s because information technology builds on itself — we are continually using the latest tools to create the next so they grow in capability at an exponential rate. This doesn’t just mean snazzier cellphones. It means that change will rock every aspect of our world. The exponential growth in computing speed will unlock a solution to global warming, unmask the secret to longer life and solve myriad other worldly conundrums. [. . .]
Take energy. Today, 70 percent of it comes from fossil fuels, a 19th-century technology. But if we could capture just one ten-thousandth of the sunlight that falls on Earth, we could meet 100 percent of the world’s energy needs using this renewable and environmentally friendly source. We can’t do that now because solar panels rely on old technology, making them expensive, inefficient, heavy and hard to install. But a new generation of panels based on nanotechnology (which manipulates matter at the level of molecules) is starting to overcome these obstacles. The tipping point at which energy from solar panels will actually be less expensive than fossil fuels is only a few years away. The power we are generating from solar is doubling every two years; at that rate, it will be able to meet all our energy needs within 20 years.
I just thought I’d toss in that third paragraph for those in the oil and gas industry that believe that a period like the mid-to-late 1980’s can’t happen again. Meanwhile, light, sweet crude oil futures for May delivery settled yesterday at $111.76, a new record, on the New York Mercantile Exchange.
Amidst the demagoguery of a U.S. Presidential campaign, it’s rare to find the mainstream media willing to run Robert Bryce’s common sense on energy policy and oil prices. For example:
Myth 3: Energy independence will let America choke off the flow of money to nasty countries.
Fans of energy independence argue that if the United States stops buying foreign energy, it will deny funds to petro-states such as Iran, Saudi Arabia and Hugo Chavez’s Venezuela. But the world marketplace doesn’t work like that. Oil is a global commodity. Its price is set globally, not locally. Oil buyers are always seeking the lowest-cost supplier. So any Saudi crude being loaded at the Red Sea port of Yanbu that doesn’t get purchased by a refinery in Corpus Christi or Houston will instead wind up in Singapore or Shanghai.
Refer to this article whenever you are listening to the candidates from either party start talking about energy policy. Come to think of it, while considering political choices, you should also keep handy this Bryan Caplan/WaPo op-ed entitled 5 Myths About Our Ballot-Box Behavior.
This Examiner.com article picks up on something that this previous post noted over a year ago — the economic absurdity of Joe “Che” Kennedy’s deal with Venezuelan strongman Hugo Chavez under which Kennedy’s non-profit Citizens Oil Corp buys discounted oil from Venequela to provide low-income American customers with a 40 percent discount on a one-time delivery of up to 200 gallons of heating oil. Kennedy rationalizes this program despite the fact that the poorest of Citizen’s customers are relatively wealthy in comparison to the 40% of Venezuelans who subsist on about $2 a day. The Examiner concludes its story with the following observation:
Curiously, despite his wealth, Kennedy receives a $400,000 annual salary [from Citizens, which is a non-profit]. Instead of embracing his uncle’s [the late John F. Kennedy] courageous anti-communist legacy, he has become just another smarmy celebrity who yammers on about having compassion for the poor from the doorways of multimillion-dollar mansions and private jets, all the while accepting oil stolen by a dictator. Lenin had a name for Western liberals who did this kind of thing ñ “useful idiots.”
I’ve been meaning to pass along a couple of interesting items regarding oil production and prices.
First, several of the bloggers over at the Oil Drum have launched an intriguing new project — a Wikipedia project in which they and a number of other contributors are accumulating data on all the major, new oil projects around the world and contributing the data to a single database that can be used to document historical trends and attempt to forecast future trends in oil production. The contributors are focusing on basic data for all of the major projects that would add new oil production capacity, including estimates of the peak flow when such information is available. My compliments to the creators of this excellent information resource.
Meanwhile, this John Cassidy column predicts that the price of oil has peaked for the time being and that prices will begin falling to the $50 a barrel range:
. . . the experts who are predicting the worst, based on geology and geopolitics, are missing the crucial role that economic incentives play in determining the price of crude. The tripling of oil prices since the summer of 2003 has unleashed forces that within the next two or three years will bring oil prices tumbling back down to below $50 a barrel. Looking even further ahead, prices could easily fall to $30 a barrel or even lower. So before you trade in your Cadillac Escalade for a Toyota Prius, think twice: $1.50-a-gallon gas might not be gone forever.
In fact, Clear Thinkers favorite James Hamilton also thinks that oil prices have peaked.
It has something to do with subsidies for ethanol.
The BBC’s Evan Davis provides a short article on how to keep the recent spike in oil prices in perspective:
It’s clear that $100 a barrel is very high. Although it’s worth saying, it’s still not a record.
1864 was in fact the most expensive year for oil. It was over $104 in today’s money. Notwithstanding that record (and most of us in the media will ignore it when talking of record highs in the next few weeks – we’ll be using the high of $104.7 reached in 1980 after the Iranian revolution) we can at least say an impending $100 barrel is getting historically significant.
And Davis provides the following observation about the market for oil that echos that of former Exxon chairman, Lee Raymond:
But the point of volatile market is that it swings both ways.
The longer we have higher oil prices, the more we can economise on oil – by switching to smaller cars for example. And the more oil that gets produced ñ a small excess of supply over demand – and the price can plummet.
The lesson of history, is that when oil prices soar up to record levels, they usually then fall back down.
And here’s one final price of oil thought for the day, courtesy of Shai Agassi:
The cost of the average used car in Europe is now cheaper than the cost of gasoline to drive it for a year . . .
If you thought that Bill O’Reilly’s ideas about gasoline prices were screwy, Bryan Caplan surveys the debate responses of the Democratic Party presidential candidates on the subject.
I don’t know what’s more troubling. The candidates’ answers or the fact that those inane answers are formulated because they help get the candidates elected to office?
As if on cue after this post from yesterday, Democratic Presidential candidate John Edwards is engaging in his usual brand of demagogery (earlier examples here):
Democratic presidential hopeful John Edwards says a wave of mergers in the oil industry should be investigated by the Justice Department to see what impact they have had on soaring gasoline prices.
During a campaign stop in Silicon Valley Thursday, Edwards planned to berate the oil industry for “anticompetitive actions” and outline an energy plan he says would reduce oil imports “and get us on a path to be virtually petroleum-free within a generation.”
“Vertically integrated companies like Exxon Mobil own every step of the production process — from extraction to refining to sale at the pump, enabling them to foreclose competition,” says an outline of Edward’s energy plan.
Now, you can peruse the “Economics-Energy Prices” category archive of this blog and find many credible resources that utterly debunk Edwards’ theory regarding the cause of rising gasoline prices. But Andrew Morriss, one of Larry Ribstein’s colleagues at the University of Illinois College of Law, provides this handy SSRN paper in which he cogently explains that governmental interference with gasoline markets has a far larger impact on gasoline prices than anything Exxon Mobil does:
Rising gasoline prices have brought energy issues back to the forefront of public policy debates. Gasoline markets today are the result of almost a hundred years of conflicting regulatory policies, which have left them dangerously fragmented. In this article, I analyze that regulatory history, highlighting the unintended consequences of regulation that have pushed the United States into a series of loosely connected regional markets rather than a broad, deep national market. This fragmentation leaves the American economy is vulnerable to natural disasters, terrorist attacks, and foreign dictators in ways that it need not be. It also produces higher prices for consumers and reduced innovation by refiners.
TigerHawk understands, too.
George Will brilliantly explains the folly of governmental initiatives to control the price of gasoline and, in so doing, exposes the true price gougers:
[House Speaker Nancy] Pelosi announced herself “particularly concerned” that the highest price of gasoline recently was in her San Francisco district — $3.49. So she endorses HR 1252 to protect consumers from “price gouging,” defined, not altogether helpfully, by a blizzard of adjectives and adverbs. Gouging occurs when gasoline prices are “unconscionably” excessive, or sellers raise prices “unreasonably” by taking “unfair” advantage of “unusual” market conditions, or when the price charged represents a “gross” disparity from the price of crude oil, or when the amount charged “grossly” exceeds the price at which gasoline is obtainable in the same area. The bill does not explain how a gouger can gouge when his product is obtainable more cheaply nearby. Actually, Pelosi’s constituents are being gouged by people like Pelosi — by government. While oil companies make about 13 cents on a gallon of gasoline, the federal government makes 18.4 cents (the federal tax) and California’s various governments make 40.2 cents (the nation’s third-highest gasoline tax). Pelosi’s San Francisco collects a local sales tax of 8.5 percent — higher than the state’s average for local sales taxes.
To understand how gasoline prices are set, read this.