Friday, November 14, 2008

Oil is still too expensive

I had the following censored from what appears to be an oil industry astroturf site today:

"It seems to me that we should set a target price of $20/barrel by controlling demand. This is above the cost of production of most oil in the current supply, and there is ample future oil to maintain that price over a decade or so. All we need to do is to direct investments into cheap-to-produce oil exclusively as we cut demand to follow depletion down. This figure that rembrandt posted from the WEO 2008 shows that investments in expensive-to-produce oil is a whole other world.


http://www.theoildrum.com/node/4755#more

We can get at least 1 trillion barrels at less than $15/barrel cost of production and that is the amount of oil that got us on to oil so it should be plenty to get us off of oil. Investing in anything more expensive than that looks to be a true waste of money and effort."

What is wrong with the sentiment expressed here? Clearly it is factually accurate. Draw a line across the figure at $15/barrel cost of production and there is plenty of oil below that cost to use to transition off of oil. That can't be the problem. The idea that demand control can control price is historically validated. There was an oil glut from 1884 to 2000 brought about by switching electricity generation off of oil and boosting efficiency in transportation. The price of oil was forced down and then kept low then. That can't be the problem. So, what is the problem?

I think that the problem is that to deal with the finite oil resource in a cost effective way, we need to start shrinking the oil industry now. And, that is not happy news for oil industry advocates. On the Internet, censorship is practiced by corporate sponsored groups or non-democratic governments. Elsewhere the ethos of freedom of expression runs too strongly to tolerate censorship. We must thus take evidence of censorship as evidence of corporate or foreign sponsorship or both. It is not unusual for the oil industry to hide its attempts to influence public opinion with false information. What strength there is in global warming denialist propaganda comes from often hidden oil industry funding. It thus appears that this must be the cause of the censorship I experienced. We are likely seeing an industry scam attempting to manipulate the price of oil.

The present price of oil, $55/barrel, is still way above the cost of production and is thus too high. None of the proposed new investments in oil supply that fall in the expensive range makes any sense compared with real energy sources like wind and solar. So, there is no reason at all not to cut the price of oil in half right now. Oil is still too expensive!

12 comments:

popmonkey said...

once again i think the problem is that cheap oil brings about complacency on the consumer side if it is reflected at the pump. we need demand destruction and high prices at the pump are an extremely simple and effective way to do this in capitalist society. i'm already hearing rumblings in the neighborhood and elsewhere that things will be just fine now that prices have dropped $2/gal (CA, US) and they can keep their suvs.

Anonymous said...

This point confuses long term oil reserves with flow rates. Most of the cheap oil is in Saudi Arabia, which is limited to ~10mbbd. You can't physically pull out 85Mbbd from Saudi or anywhere else...the world is pretty much working at full capacity to produce 85mbbd. Oil pricing trends are primarily driven by the cost of producing the last barrel of oil demanded. Reserves don't really affect pricing short term. Even at $100/barrel, oil still provides an incredible value-add to our society.

Chris Dudley said...

Hi popmonkey and welcome back,

Cheap oil brings about complacency if we are not always striving to keep oil cheap. In the past, keeping oil cheap was the job of the suppliers but now it must be the job of the consumers. We can't have cheap oil unless we reduce consumption. And, we must reduce consumption dramatically if we are to keep oil a cheap-to-produce product in the future.

popmonkey said...

i'm still having an extremely difficult time imagining how the consumer can be educated to use less when it's cheap again. even if low mpg vehicles were heavily taxed, people are just gonna buy priuses and drive more. what's needed is a way to get consumers to actually have incentives not to use private transportation as much. your previous proposition of a ration system is not going to fly in most first world, democratic countries. consumers are just too stupid as a whole to see the good in such a plan and would fight it. give me an example of anything we currently ration that consumers are ok with.

i understand your point in why keeping prices low makes exploration less desirable stopping the pointless race to acquire more expensive reserves, but while it's a nice theory i still can't imagine any transition plan that could actually accomplish this without mass riots...

most americans, for example, still believe that oil prices are 100% controlled by government and corporations and there's endless supplies of the stuff. even those who are aware of the limitations still see it as some sort of resource right that they have.

Chris Dudley said...

popmonkey,

I still favor rationing and having the US take the lead in cutting consumption. This is something that can be initiated by the US President without Congress because Congress has already approved the rationing plan. Right now, rationing can be justified simply on the basis of keeping dollars in the country during a time of economic difficulty.

You are worries about Jevons' paradox, but we are not talking about a situation where more oil is available to allow more driving. Less would be available.

Rationing establishes a right to a certain amount of fuel at a low price so I think it might fit just fine with what you feel is the American sense of entitlement.

One thing we ration right now is cash. Another is education in medicine. Standards for passing the Bar also seem to limit the supply of lawyers so that justice is also rationed. After you think about it a little, you'll probably think of some other things that are limited arbitrarily as well.

Anonymous said...

Leif here:

Thank you for your efforts on CP. The more I think about our solution the more I like it. It sure appears to have the advantage of being unique. Perhaps we should pursue it more and see if it has legs and perhaps some money in it.

It has been fun...

Two Palms Up,

Leif

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