The Price of Oil

The Economist Editor, Bill Emmott has just written an article in the Times. Its principal theme is that OPEC’s greed will herald the end of the oil age.

The first paragraph really contains the essence. It says “the world is not running out of oil, what it is short of has been investment in oil fields and production. The reasons for that ……..…OPEC”.

The corollary of Bill Emmott’s thesis is that there is infinite oil in existence, that the world only has to spend enough money and we can merrily go ahead using it as our principal source of energy.

Let me put a completely alternative argument.

If the world had infinite oil, and instead of the core of the earth being made from liquid iron, that it actually was made from a gigantic oil lake, should we go on merrily increasing our consumption? The Intergovernmental Panel on Climate Change (IPCC) has expressed a view on this. Research carried out by various teams into the relationship between greenhouse gas concentrations and global air temperature has independently verified the global warming hypothesis.

We need to do as Europe has suggested, and that is to reduce emissions of green house gasses by 80% from their 1990 levels by 2050.

Bill Emmott laments the fact that Saudi Arabia has moved its ideal price from $25 to $75 per barrel.

Why?

As an economist he surely realises that the most important creator of alternatives is price signals. What I lament is that Saudi Arabia did not give us a $75 price from 1990 onwards. This would have spurred great quantities of innovation. We would be sixteen years ahead in our quest for alternatives. By now Europe would be making 40% of its electricity from wind and solar instead of 16%. We would not be facing crazy price fluctuations that we have seen recently in the price for a barrel of oil. We would have introduced a major risk damping component into the price of oil by substituting fixed price wind and solar for it.

Bill Emmott ignores the incredible value locked up in the beautiful oil molecule. This ordered array of carbon and hydrogen atoms could, with manipulation be the basis of thousands of humanly needed products for millennia to come. Burning it at an efficiency of 30% is just about the stupidest proposition that occurs to this commentators mind.

It is of course true that oil will more or less always be around, it is locked up in all kinds of geological formations and the bulk of it is unextractable; unextractable that is at low prices.

A typical example of an oil field is the great Berry Field in Saudi Arabia. It is estimated that of the total reserves at Berry, 21% can be recovered.

Horizontal drilling could possibly raise the Berry ultimate recovery rate to 24-25%. So, some millions of tonnes will remain in the ground. This oil is only irrecoverable when prices are low $100 – $200 a barrel. If oil is seen in the context of the manufacture of carbon fibres, nano technology, hi grade pharmaceuticals, photovoltaic production, then prices of $500 a barrel would be quite justified.

Saudi Arabia and the Gulf States are being logical in their new pricing formula. This commentator would far prefer to see the price grow to support the lifestyle of 20 million people in Saudi. Instead of burning the highly ordered hydrocarbon molecule and turning it into atmosphere degrading CO2 for prices around $75/barrel, would it not be preferable to see one tenth of it being used to produce high value products at ten times the price? This way we would have solved the 80% CO2 reduction objective, while leaving the earnings of the oil producing states static. This way they would have secure earnings for hundreds of years.

Oil has a tremendous role to play in our future development of the planet. But first we must stop burning the stuff; it is far too precious for that.

As every economist knows the primary economic tool for adjusting behaviour is price signals. Thank God we are at last getting some proper price signals for oil.

One Response to The Price of Oil

  1. Dan McGovern September 3, 2009 at 5:18 pm #

    Great blogging Eddie.

    MRP is a company that is definitely going places.

    Regards
    Dan

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