Saturday, December 06, 2008

 

Oil Production: To Cut or Not to Cut

Oil-producing countries face a choice of either reducing oil production or not reducing it, but no matter which they choose, there would seem to be no outcome favorable to anyone. Here is one article that touches on the problem.

Choice One is to maintain production and let oil prices fall as low as they will go. If there is any chance that the world industrial economy will be revived, it will require cheap and abundant energy. In this sense, everyone would prefer Choice One for its positive economic effect. On the other hand, the downside is the devastating impact this will have on the economies of countries that depend largely or mainly on oil revenues to support their economies, and the depressing effect on new oil field development.

Choice Two is to cut production until crude prices rise to a level that can support oil-producing countries’ economies and provide enough capital to fund new oil field exploration and development. The figure of $70/bbl is often quoted, although you will find lower and higher figures. The downside here is that if oil prices are kept high, that will pretty much quash any hopes of reviving the industrial economy (which would only be temporary, anyway).

Over the long term, industrial civilization is declining. With that inevitability in mind, keeping a floor under oil prices is good because it will enforce the trend toward powering down. Therefore with the future in mind, Choice Two is the better alternative.



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