Friday, August 10, 2007

 

Will Oil Go to $100?

There’s a lot of speculation about whether oil will sell for $100/bbl, and if so, how soon. Some say it will be only a matter of months, and certainly they offer plenty of factors which could be the cause. On the other hand, some say that oil will never hit $100 because of new production, biofuels, and conservation.

There are plenty of good oil price analyses out there, so I won’t waste time and space by repeating them here. But I would like to briefly discuss these three factors of new production, biofuels, and conservation, and assess whether they might hold down the price of oil.

First, new production isn’t nearly as promising as one would hope. Simply put, oil in the ground does not equal gas at the pump. There is a development process — after you have discovered oil — that is getting increasingly long and expensive because the easy oil has already been found. So new production simply cannot bring us the gushers of cheap energy that built the petroleum civilization, and unless demand falters considerably, the price of oil will keep rising.

Second, I've provided plenty of discussion and links on this blog showing that biofuels are more bust than savior. A link I’ll add here is for a discussion showing that using ethanol does not displace oil imports. Biofuels are a disaster on a large scale and can never replace oil. But their production does use plenty of oil, deplete lots of farmland, and raise food prices.

Third is the idea that conservation will save the day. Make no mistake about it: conservation is good. But people don’t like to conserve, and especially in the US, the world’s biggest oil consumer, skimping on energy is viewed by most of the population as un-American. Indeed, Americans have a sense of entitlement which convinces them that they have a right to consume lots of resources and energy, the rest of the world be damned. Another factor is that the Pentagon is the world’s single biggest oil consumer, and how much energy conservation do you think the Pentagon will be doing, especially as the neocons strive mightily to extend America’s rule over the world with more wars and military bases? Precious little, my friend. Still another factor is the American car culture and the auto industry that underpins it. Americans clearly like big cars because they keep driving them even while grumbling about the price of gas. US automakers don’t like fuel efficiency standards, or making small cars, for that matter. Indicative of this is a statement by the president of Ford saying that fuel efficiency regulations “distort” the market because they force automakers to make more fuel-efficient cars than the market demands. I shall leave the reader to see the obvious problem with this line of thinking.

On the whole, energy conservation just isn’t a significant part of American culture, and can’t be counted on to help hold the price of oil down. Biofuels are a bust. And new production can’t replace what is being lost (about 1 million b/d).

Conclusion: Look for oil to hit $100.



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