Tuesday, July 10, 2007

Caution: American Media Bored by Oil

As refineries finally catch up with demand, gasoline prices continue to drift down, but there has been little news about the rising price of oil over the last number of weeks. In January, oil fell to a low of $51/barrel but the price is now floating above $70/barrel and there are signs it may be awhile before it comes down again, assuming oil somewhat follows the pattern of the last two or three years. There's seemingly little coverage of this in the news. Perhaps the media is bored since Paris Hilton can't be tied to the oil story somehow. Of course, if hurricanes hit at any point in the next ten weeks, the price of oil will probably continue to soar.

Here's a story from the Financial Times worth noting:
A rule of thumb for the price of oil in the past five years has been to take the last digit of the year and add a zero: 2002 saw prices in the $20s; 2003 in the $30s; now oil is hovering around $70 a barrel. These high prices are desirable for steering the economy away from oil, but in the meantime they could also spell trouble. Oil companies need to adjust to this new reality and rethink their business model.

The latest report by the International Energy Agency warns of an oil supply crunch in five years. Demand is expected to rise at more than 2 per cent annually. Supply, the IEA calculates, will not be able to keep pace. Nations outside the Organisation of the Petroleum Exporting Countries are expected to add about 1 per cent to supplies per year. That puts most of the burden on Opec, in particular Saudi Arabia, which would face capacity constraints itself, the IEA says.

There's an active debate taking place in various locations around the world about when (not if) the oil crunch will occur, with some people arguing that the crunch has more or less already arrived. But the exact time the oil crunch will come is not the issue. The issue is that the time for making a reasonably painless transition to a world economy that can use other sources of energy in addition to diminishing supplies of oil has, in fact, been around for some three decades. The time to sell that big SUV and get something with better mileage is not five years from now, but today. Given the number of conservative-leaning contrarians in the United States, I suspect the transition to a new energy economy is unlikely to be painless.

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Anonymous S.W. Anderson said...

Going by that rule of thumb, I'm looking forward to 2010!

On a more serious note, one of your statements brings up an unfortunate dynamic of our oil/energy situation.

"The time to sell that big SUV and get something with better mileage is not five years from now, but today."

OK, so I sell a big SUV and replace it with, say, a Prius. That's good for me but not much help for the U.S. where energy independence is concerned.

Remember, someone else bought my big SUV and is out driving it.

Where the unfortunate dynamic comes in — and we saw it back in the 1970s — is that as more-affluent Americans sell or trade in their gas guzzlers for more-economical vehicles, less-affluent people buy up the out-of-favor, inefficient castoffs.

Perversely, at the end of the day, net fuel savings across the economy are surprisingly modest.

7:38 PM  

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