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December 30, 2008

Is oil cheap only because of the recession?

New York Times columnist/blogger John Tierney linked to my post last week on his bet on oil prices with Matthew Simmons. Reprising Julian Simon's famous bet with Paul Ehrlich, Tierny bet "Peak Oil" theorist Simmons on the average daily price of oil in 2010. Tierney says it'll be less than $200; Simmons says more.

Several commenters on Tierney's blog seem to acknowledge that he's likely to win. (Oil is below $40.) But they say he lucked out with the severe global recession, which has depressed the demand for energy. The oil-price plunge, these commenters suggest, says nothing about long-term resource sustainability and long-term resource prices.

Not true. Granted, the recession does force energy prices lower, and the recession won't last forever. But recessions and limits to growth are a crucial factor in favor of anybody who's betting against long-term resource inflation. Until recently world GDP was growing close to an annual rate of 5 percent -- an astonishingly fast pace. The idea that it couldn't keep up was crucial to anybody betting against higher oil prices. Unsustainable demand was a key factor in the oil bubble.

But the business cycle is only one way economies adjust to seemingly scarce resources. When resources become expensive, we buy fewer of them. When resources become expensive, people switch to alternatives. When resources become expensive, entrepreneurs seek new sources or invent technology to better exploit old ones. All of these things have been going on with oil in the last two years. They are real but unmeasurable factors in its price decline. It's not just the recession. Tierney didn't luck out. He knew the odds favor the resource optimists for many reasons.

The real problem with sustainability has to do with carbon emissions and climate change. So far the true cost of carbon emissions isn't priced into oil and other energy. We need to price carbon correctly -- through a tax or a cap-and-trade system -- so that the myriad, uncoordinated economic adjustments that have made oil less than $40 can also work to mitigate global warming.

Posted by Jay Hancock at 10:55 AM | | Comments (9)


The problem with alternative fuels is that they don't deliver the same amount of concentrated energy in the quantities that are required. Some have stated it would take over 150 square miles of land with 24 hour sun exposure to equal the energy output of 1 gasoline station in this country.

Uncapping old wells as oil prices go up will add a substantial amount of oil to our supply, probably the biggest known resource of oil is closed wells. The older the well, the more oil that's in it. Many were abandoned with 50-60% of their oil still there. But nothing changes the fact that we are producing oil at 4 times the rate that we are finding it and contrary to belief, it isn't for a lack of trying. There have been many dry wells drilled. The finds are getting smaller and more energy intense to get to which lowers the EROEI ratio. The fact that we are mining Tarsands is proof that there is an oil shortage. Why in the world would we embark on a 5:1 as low as 3:1 EROEI production if there were better options? Also, oil is not just used for energy. Oil makes plastics, asphault, medicine, man made fibers, etc. I think Algae is probably the future of liquid energy, or at least a large part of it. Corn Ethanol is worthless, and most of the others are loaded with problems as well, such as forest loss, crop diversion leading to food shortages, soil depletion, fresh water shortages and they rely on fossil fuels for every stage from seed to pump.

Oil is cheap because the demand for oil has dipped, but soon oil supply will drop continuously and oil prices will rise and rise.

Independent studies conclude that Peak Oil production will occur (or has occurred) between 2005 to 2010 (projected year for peak in parentheses), as follows:

* Association for the Study of Peak Oil (2007)

* Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008)

* Tony Eriksen, Oil stock analyst (2008)

* Matthew Simmons, Energy investment banker, (2007)

* T. Boone Pickens, Oil and gas investor (2007)

* U.S. Army Corps of Engineers (2005)

* Kenneth S. Deffeyes, Princeton professor and retired shell Geologist (2005)

* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)

* Chris Skrebowski, Editor of “Petroleum Review” (2010)

* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)

* Energy Watch Group in Germany (2006)

Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed:

I used to live in NH-USA, but moved to a more sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207.

A barrel of crude oil is cheaper than bottled water in supermarkets.

In mostly all western European countries a bottle of one and half litres of water costs 0.70 Euros. In order to compare both prices you need to buy 106 bottles of water to get 159 litres, equivalent to a barrel of crude oil, so 106 x 0.7 euro = 74.20 euro
Now we have to change euro to dollar so, 74.20 euro x 1.4 = 103.88 dollars.

As you can see, you have to pay 103.88 dollars to get 159 litres of bottled water, but you only need 35 dollars to get a barrel of crude oil.

80% of the income of countries like Saudi Arabia, Iran, Kuwait, Arab Emirates, Iraq, Venezuela, and almost the rest of the oil exporters’ countries is based on the sale of this raw material.

Oil is a very scarce good and the leaders of these countries must act with caution and responsibility in order to benefit their economies because their political stability and well-being of their citizens depends on it.

These countries have been selling their oil at a loss for the last 100 years ($8 pb, $10 pb, $20 pb and now $35 pb). They have given their oil to industrialized countries and these ones have become economic and military leaders.

The oil reserves in operative oilfields started declining years ago but the world needs and demands more and more oil year after year. In the last 25 years, we haven’t discovered any important oilfields and the new ones are very difficult and very costly to operate. Most of them are placed in far open sea and in very deep water sea. The other ones are placed in land but in abysmal depths with low capacities.

How long do you think that the price could remain here? 6 month? 1 year? year and half?
How lower could it go? $30 pb? $25 pb? $20 pb? Less? Ok, now please tell me, do us, japan,
and Europe want to recover the crisis making cars and building houses? do they want to recover the employment? in order to revive the economy they must put money in it, then the people can get employment and buy cars and houses, it means opened factories and banks, it means money in hand, and IT MEANS OIL DAMAND, this is the true reality, Geopolitical conflicts with Iran in Persian gulf and strait of hormuz , problems in Venezuela, in Arabia Saudi, Israel- etc .etc. natural disasters in gulf of Mexico, India, China, all these MEAN OIL DAMAND, but the world must go on and on, so no matter how long it takes, we will see oil at $147 0r $200 or maybe more, who knows!

Best regards

This article is bunk. The auther is an ignorant, capitalist that believes the economy will grow forever fueled by dreams and happiness. There is/are no substitute(s) for oil. Mr. Hancock, in the future, when the term "Fossil Fuel Bubble" becomes the latest cliche of the day, remember where you heard it first. Also, think about what it means.

This article is bunk. The auther is an ignorant, capitalist that believes the economy will grow forever fueled by dreams and happiness. There is/are no substitute(s) for oil. Mr. Hancock, in the future, when the term "Fossil Fuel Bubble" becomes the latest cliche of the day, remember where you heard it first. Also, think about what it means.


While supply will fall due to cheap prices, so long as there is a recession, oil prices wont rise even with a supply cut. Say OPEC was successful driving oil up to $75 thru cuts. But the world economy right now is too weak to support $75 oil. The recession would deepen further thus reducing demand and price. A real price spike above $150 will occur when the economy recovers

fools believe in unlimited growth on a finite planet.

Amazing how fast circumstances change. Only last summer the peak oil advocates were almost gleeful as there predictions seemed to be coming true. Now we are back to basic Yergin - Eventually the oil will run out but in the short term there is a glut of available oil. I remember the 70s as the first time people started thinking about it. People familiar with that time will remember the oil minister of Saudi Arabia, Sheik Yamani. He said, "The stone Age didn't end with a shortage of stones and the Oil Age won't end because of a shortage of oil." I don't happen to believe the oil companies theories on how oil is formed but I agree that even if oil is abiotic in creation we don't know at what rates and where it will be formed so as to replace the oil which we are greedily consuming. The only knowable fact in the debate is - the easy cheap to obtain sweet crude is running out. I am in agreement with some Peak Oil advocates in that the present economic dictum of unrestrained growth is the strategy of cancer. I think that the mainstream consensus on why the Earth was warmer in the 80s and 90s is wrong so the CO2 solutions are just wrong and money poorly spent but that's another debate.

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Tuesdays and Sundays.

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