Comments on: Are high oil prices here to stay ?

By: shelby

shelby — Tue, 11 May 2004 00:37:26 +0000

David: To an extent it’s true that “If there is a net energy loss required in the utilization of a resource than that resource will not be used,” but not as true as it used to be. Increasingly oil is used (certainly in the US, I think elsewhere as well) for internal combustion engines. Cars and trucks are not easily converted to fuels other than gasoline and diesel, compared to (eg) house and office furnaces that burn heating oil. Even if it takes more energy to extract oil than the oil itself yields, oil’s greater utility in vehicles (and perhaps some other applications) will still mean it makes economic sense to extract it.

By: John Quiggin

John Quiggin — Mon, 10 May 2004 23:10:16 +0000

gavin, thanks for your quibble, which I have now attended to.

By: David

David — Mon, 10 May 2004 22:18:54 +0000

It has to be remembered that oil extraction cannot be considered purely on an economic basis. Just because oil prices rise it does not mean that it is possible to extract oil from more marginal sources. It takes ENERGY to extract oil. If there is a net energy loss required in the utilization of a resource than that resource will not be used. So even if oil hits $200 a barrel then there are still resources which can never be utilized because they would be an energy sink.

By: Nat Whilk

Nat Whilk — Mon, 10 May 2004 17:30:54 +0000

Lance Boyle wrote: “380+ million gallons of gasoline. In the US. A day. Imagine what that would look, feel, and smell like, if you did it all in one spot, instead of spread out over the continental US. People that talk about the use of gasoline as though they were speaking of some sensible human practice seem really bizarre.” It seems like the same logic would reveal that excreting isn’t a sensible human practice.

By: derrida derider

derrida derider — Mon, 10 May 2004 11:16:37 +0000

my guess is that large-scale shale projects won’t work with prices less than $US50/barrel. Coal-to-oil probably becomes feasible somewhere in the same price range. – john quiggin Grist for my mill. Oil prices touched $40 a barrel today. If oil reserve exhaustion causes a slow 25% increase from there I can’t see how that would be catastrophic. Even a fast increase to a sustained $50 might bring a nasty recession but would not be much of a long-run problem.

By: tombo

tombo — Mon, 10 May 2004 05:09:59 +0000

My views on “the Iraq War was all about oil” have been misunderstood. Of course it was about oil… for France and Russia. Saddam was by far their best and most lucrative client in the middle east, and the lucre was kicked back in several cases directly to top French and Russian politicians. LUKoil signed deals worth billions with Saddam, who had stiffed the Soviet Union’s successor state for many billions more. TotalFinaElf, thanks to intervention by Saddam’s old copain, Jacques C. and his boy wonder in the Quai d’Orsay, scored an eleventh-hour deal in Nov 2002 to develop the W. Qurna oilfields, which alone contain about one-third of Iraq’s ENTIRE RESERVES (20B, if memory serves). How many billions was that deal worth? Note also that a billion to the French has about eight times the proportional economic impact on them than it would on the US. For Russia, an economic midget, the ten billion+ they hoped to pimp out of Saddam amounted to about 3% of their entire economy. In short, the French and Russian policy toward Saddam—ie, sign deals, launder money for him, accept personal kickbacks totaling many millions, all while Oil-for-Fraud enabled Saddam to starve and slaughter thousands every month—was truly an oil-centric policy. Leftists got the rap correct—it was indeed all about oil; they just got the wrong perp.

By: brown

brown — Sun, 09 May 2004 23:43:42 +0000

Jack- My original post was disputing the proposition that the reduction in oil reserves would lead to a collapse of society, which is alarmist nonsense. However, it doesn’t mean that oil is not an important issue (just not life-threatening). You covered two very interesting questions: 1. What determines the price of oil? 2. Did Iraq’s proximity to oil fields affect the decision to occupy Iraq? We could write a book on each question, and I am not sure all the issues can be covered in a blog. 1. What determines the price of oil? A lot of factors, some short term. Whether political or economic demand/supply factors are involved, it should be noted that in the last 7 years there have been extremely wide swings in the price of oil (maximum 40USD, minimum 15USD). The major problem with this instability is that it increases risk, which increases (risk premium) the price of large energy projects. It is also clear that speculators have a role, although it is not clear how much. Demand is a factor: the future we can definitely say will be “interesting” – let us suppose that China doubles its consumption of oil to 10 mbd this would add an additional 5mbd demand increasing total world imports by more than 10%, which is going to directly feed into the profits of the oil exporting nations: Saudi, Russia, Norway, UAE, Nigeria, Mexico, Iraq, Libya, Algeria, Oman, Canada. (Maybe it is not surprising Mexico opposed the US occupation of an oil exporting nation!). Also note that the oil price now may seem high, but 40 dollars a barrel now is a lot less painful than it was in 1980, any sensible economic plan should include measures to deal with a 100 dollar price. Also, look at the innovations in energy saving that have been made in the last 30 years, so it is possible now that many economies will cope better now with an oil price crisis that they did in the 1970s. 2. Did Iraq’s proximity to oil fields affect the US decision to occupy Iraq? Iran/Iraq and the ME is mainly of interest because of the oil (it is not the rocky deserts, melons or mosques). Since the 1970s the possibility has existed that Muslim oil nations could agree to stop selling oil to the USA until the Israeli state was dismantled, or reduced to the pre-1967 borders. With this in mind, and the loss of support from Saudi Arabia and Iran over the last 30 years would mean that the creation of a pro-US regime in Iraq could assist in the breaking of any future oil cartel. With this in mind, a pro-US Iraqi government would be a great help to the US but who knows what goes on in the great minds that formulate policy?

By: Thomas

Thomas — Sun, 09 May 2004 20:31:10 +0000

David makes what might be thought a humorous point—that Canada should be considered a candidate for invasion, as it has substantial oil reserves. I don’t think that a change in Canada’s borders counts as farfetched. In fact, I expect that the oil-rich provinces will join the US within a generation. But I think that majorities will freely choose that path, so invasion won’t be necessary.

By: Jack

Jack — Sun, 09 May 2004 20:01:02 +0000

brown: I’m sure that if the price of oil were to rise gradually we would slow down our usage, find substitutes etc. What is less clear to me is the extent to which oil prices are determined by market forces. For example I would expect the price of any finite asset to be sensitive to falling interest rates as consumption preferences switch to the future. It is not clear to me that this happens. It seems entirely possible that prices are in fact under political control and therefore that it is possible that our heads are in the sand on this issue. It certainly would be painful now if energy costs were to rise to the equivalent of say $100 a barrel. Wider and cheaper access to energy has been a major part of industrial development and it must be big news if the trend reverses. This relates to Krugman’s point about the coming struggle for resources. While the war in Iraq may not have been at the behest of the oil companies and it may not have been directly to get US hands on Iraqi oil (it would have been cheaper to buy it surely) it would be bizarre to think that it wasn’t a consideration. Firstly US troops have, as bin Laden requested, withdrawn from Saudi Arabia. Allowing Saudi, Iraq and then, no doubt after much bloodshed, Iran to fall into the hands of Al Qaeda or even Saddam really would be a disaster. I’m prepared to entertain criticism of the efficacy of measures actually taken but I certainly hope someone is thinking about the oil. Secondly it can be about oil even if oil companies didn’t want it. Oil companies are used to dealling with regimes of dubious virtue and may have a relatively short term view of the situation which one hopes contrasts with a longer term view from policy wonks and sometimes politicians. Thirdly Krugman doesn’t actually say it is about the oil, he just quotes a major figure expressing hopes that it will cut the oil price. That for some reason being a good thing. He chose Rupert Murdoch but he could have chosen Steven den Beste or many other figures hoping for this side effect. Fourthly, most “its about the oil” arguments are normally why Iraq and not Sudan or Uzbekistan or Myanmar or North Korea type rather than accusations of naked land grabs. There have been interventions that clearly have not been about the war. Afghanistan is probably the best example, Bosnia was too small, Somalia too short lived to even begin to compare to the commitment in Iraq and in any case happened under a previous regime.

By: crayz

crayz — Sun, 09 May 2004 07:40:03 +0000

brown – you may be right warren – your antithesis to logic makes my brain hurt

By: Warren

Warren — Sun, 09 May 2004 07:25:45 +0000

If the US invaded Iraq “Because of the Oil”, then the US would have invaded Saudi Arabia first, it has more oil.

By: Lance Boyle

Lance Boyle — Sun, 09 May 2004 07:03:09 +0000

380+ million gallons of gasoline. In the US. A day. Imagine what that would look, feel, and smell like, if you did it all in one spot, instead of spread out over the continental US. People that talk about the use of gasoline as though they were speaking of some sensible human practice seem really bizarre.

By: tombo

tombo — Sun, 09 May 2004 03:18:30 +0000

Don’t forget those massive oil reserves in Bosnia and Somalia. And that crucial Afghan pipeline that will carry one-third of the world’s oil production within ten years.

By: David Sucher

David Sucher — Sat, 08 May 2004 23:18:25 +0000

Don’t forget to put Canada on the list of nations which we might invade, as it too has significant oil.

By: Dean Jens

Dean Jens — Sat, 08 May 2004 23:13:19 +0000

I’m increasingly thinking that prices are going to stay high, that OPEC has no control over them, and any efforts OPEC makes to attract blame for them is intended to sustain political importance. Though I could be wrong.