Baltimore, MD—"There are two words that you will never hear again in the same sentence: ‘cheap' and ‘oil.'" I remember saying this more than seven months ago, as oil was trading above $60 a barrel.
But I should confess something. . .
I was completely wrong.
Before you jump the gun with jests and accusations, just hear me out for a minute (because I know many of you will feel the same way). You see, there's a chance I'll be sitting at my desk six months from now reminiscing about how oil used to be so much cheaper in the mid-$70s.
I know oil prices always fall during the winter. Believe me, I thought they'd already be heading lower.
That's not the case, though. I'll let last week's Energy Information Administration (EIA) petroleum report show you what I mean . . .
For the last four weeks, crude oil spot prices rose significantly. Notice that last week's spot price was $23.59 more than the previous year.
quot;Well, maybe they're going to start heading down now?" you ask.
Possibly, but I wouldn't bet the farm on it. In fact, oil prices are expected to rise above $85 a barrel before the end of 2007 and to over $100 a barrel next year.
It's not good enough for us just to hear somebody say that oil is going to rise. My thirteen-year-old niece could make that prediction. We want to know why we're in trouble.
And we seem to blame the wrong people, too. Just the other day, I was talking about gas prices with my neighbor when the record crude oil price of $83.90 a barrel came up. I was curious as to how he felt. "So what do you think is causing all this?"
"It's those damn big oil companies. Exxon and all them guys are ruining everything, trying to keep prices high to get more of our money," he said matter-of-factly.
Imagine his surprise when I told him that all the "big" oil companies like Exxon control less than 10% of the production. He gave me a curious stare when I mentioned peak oil to him. He had never even heard of it before.
"Well, that'll change soon, because it's going to be an issue as big as global warming within the next couple of years."
Here's the thing: The more we see how tight global supply and demand are getting, the more our minds focus on peak oil.
Peak oil, of course, is the point when global oil production peaks and begins to decline.
Here are the facts: Right now the world is producing roughly 85 million barrels per day (mmbbls/day). And producers are struggling to maintain production from depleting oil fields. My question is: What do you think will happen when we're still producing 85 mmbbls/day in the near future, but consuming 88 mmbbls/day?
Even if production doesn't steeply decline like the peak oil theory claims, but rather plateaus like the International Energy Agency (IEA) suggests, the gap between supply and demand will continue to widen. That'll lead to considerably higher oil prices, well in excess of $100 a barrel.
Not only is oil getting more expensive to extract, but we're also not seeing the same major discoveries we were decades ago. There are no more Ghawars out there, plain and simple.
I believe we'll easily see $90 oil before it drops below $70 a barrel, especially if the EIA's weekly oil report continues to show crude oil stocks dropping. U.S. stocks last week were about four million barrels less than last year.
Savor It Now While You Still Can
I told you I was wrong about oil never being cheap again.
The truth is that oil is incredibly cheap right now compared to what we'll see in the future—which raises the question, "What is the true price of oil?"
In 2002, we all would've agreed that $50 for a barrel of oil would be ridiculous, considering prices were $20 a barrel. A few years later, we would have said that $60 oil would never sustain itself, and prices would soon be back to $30. All of a sudden people are saying that $100 oil is within reason?
What's next?
When we're consuming 97 million barrels per day in 2015 (according to the optimistic EIA estimates) and production is still in its "plateau," will we think $300 for a barrel of oil is cheap?
Let's just enjoy $80 while we can.
Until next time,
Keith Kohl
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What do you think the impact of alternatives such as ethanol, biodiesel, synthetic bio diesel, and sythetic diesel from coal will be on oil prices and over what period of time will it occure. Processes using algae as suggested by Ex MIT by using algae from CO2 extraction systems in power stations shows a potential to deliver high volues of alternative supplies of both ethanol and biodiesel.(1000megawatt station bi product being 40m gallons of biodiesel and 50m gallons of ethanol?)
I would be interested in your thought on when and if such alternatives would have an impact. I done think we can just talk about the price effect of peak oil but must also make people and markets aware of the alternatives that need to be accelerated to avoid economic chaos.
Barry
Unfortunately, your neighbor's belief that high oil prices (and many other evils as well) are the fault of the "big oil companies" is commonly held throughout western society. The comment by "Idiot" reflects an equally common belief: higher taxes on oil companies will solve the problem. Twenty years ago, I worked for "big oil" and now I am "little oil". Big or little, the cost of finding new reserves is profoundly high. We get absolutely no subsidies from the government. Increasing taxes will do two things: (1) It will take the smaller companies like mine out of the game. (2) It will disproportionately raise energy costs because the tax will ultimately be passed along to the gas pump and fewer reserves will be developed. In reality, the government entities throughout the western world are smacking their lips in anticipation of the wind fall that they will get as the public cries out for higher taxes on the oil companies. Just this month, the Province of Alberta, Canada, is trying to increase the royalty paid to the Province on all oil and gas produced there. Already, land and op costs have sky-rocketed in western Canada and the cost to pruduce an MCF of gas has gone up to the point that the producers will stop drilling if the royalty is approved. This will push gas prices up very quickly. A major segment of the natural gas burned in the US comes from Alberta. As that supply decreases, gas prices will go up and major utilities will shift back to oil. That will increase gasoline prices at the pump....and the public will scream for higher taxes on the oil companies. The real problem is that the US does not have an energy policy that addresses the realities of energy supply and demand. The oil shale in the Rocky Mts contains enough oil to free us from dependence upon any foreign source of energy. However, environmental policy and cost to develop infrastructure and produce oil from shale will prevent any such development. In the early 80's, I worked on technology to develop and produce oil from shale. At that time, we thought that oil shale production would be economic at $32/bbl. Now the cost is closer to $120/bbl just to justify the environmentally friendly infrastructure that will be required. High energy prices and related problems are not the fault of oil companies, big or little. These problems are largely due to the energy illiterate politicians who pander to the emotions of an over taxed and energy hungry populace that is addicted to cheap energy.
Yes, peak oil is here, but both political parties will continue to fiddle while Rome burns.
WRB
The price today is nothing to do with supply and demand. EWven if stocks are lower than last year...so what? There is plenty to go around... The issue is when will oil run out. And as prices go higher there is more exploration and fileds that werwent commercially viable before become so.. So more oil gets pumped and is available.
These prices should appear in 20-50 years not now!