Oil: Inventories vs. Production
As noted by many other thoughtful commenters, the sharp drop in oil (and gasoline) prices over the past few months has not reflected the 'end' of oil shortages. In fact, just the opposite.
What has happened is simple: faced with the all-time highs in price, people and governments changed their behavior on the spot. Demand slackened and supplies were hoarded. In the interim, the price for current crude dropped. Of course, increased inventories do not imply increased production.
That means that if demand should rise again (and believe me, China and India haven't abruptly stopped their modernization), hoarding is the only way to guard against shocks. World-wide production has probably peaked. So price spikes and depressions will become more commonplace. $3 gasoline one month, $2.50 the next, $3.25 the one after that.
Yet our energy policies remain scattered and inconsistent. With the federal government and our 'Legislature' unwilling to do anything significant in any even-numbered year, I say again that this issue has to be taken up at the state level. State gas taxes, state public-private partnerships for mass transit and renewables, and common-sense local zoning.
In that vein, I'd like to hear from the commenters on local and state measures in their neck of the woods that they think should be adopted in other localities.
posted by Joshua @ 4:14 PM
2 Comments:
A very thorough and interesting analysis. Let me add some additional comments at points on which we may differ.
"Of course, market forces being what they are, more supply will come online. with oil at $50/60/70 a barrel, mining the tar sands of Canada becomes economically viable. Pulling oil our of super-deep well in the Gulf of Mexico is viable, and supply will come online in the next few years."
Setting aside concerns about demand (China, India, etc...), I think your statement above is the crux of it. Economically speaking, the higher prices go, the more willing producers are to extract the difficult oil fields such as Canadian 'tar sands' and the super-deep GoM. Were this the end of it, prices would remain balanced, or as you say, "mellow."
But we're not in a ceteris paribus situation, are we? The other producers' capacity isn't holding steady. Saudi Arabia doesn't have any slack, and I would dare say some of their fields have peaked. Other OPEC nations are experiencing production drops. The UK's North Sea fields are cutting back drastically. As the aggregate effect of this becomes clearer, I think 'mellow' is the last word we'd use to describe the situation.
Which isn't to say the tar sands and/or deep well oil isn't going to be tapped. I just think it won't counterbalance the aggregate losses that will start to become clear in the very near future. The supply side itself is enough to make the case for an upward price trend. The only thing that I believe is in doubt is the slope of the upward curve, and there we both agree it depends on outside actors (storms, terrorists, etc...).
Getting back to the point I made on my other post, this is why a graduated increase in the gasoline tax (or a reduction in subsidies, your call) makes all the sense in the world. If we know or suspect that world production capacity has maxed out, we have to lower our demand for what will possibly become more of a luxury commodity. If at the same time we can help the federal budget and put money into modern transportation infrastructure, why not do it?
"The Saudi stated a couple months ago that they have enough reserves to supply the entire world with all its demand at current levels..."
Yes, but they're lying. Or, to be more polite, exaggerating, as Matthew Simmons posits.
Why would they do this? Well, it's pretty simple. If they were to admit that their reserves were (say) half of their previous estimate and that an even smaller amount is recoverable, their geopolitical importance would diminish considerably. Could the House of Saud survive without our backing and petro-income? Probably not. So it's very much in their interest to claim they can keep the party going for some time.
And it's not like Arab nationalist / Islamic regimes haven't exaggerated to save face (and skin) before! In 1967, Nasser's communications to the Jordanians were full of deception, maybe even self-delusion. Although the Israelis had already smashed the Egyptian Air Force to bits, Nasser's messages gave every indication that the Egyptians were holding the line. Why? To preserve his (assumed) position as leader of the Arab national states. Recall also that following that defeat (and subsequent peace with Israel), Egypt began to lose its position among the Arab states.
On those bases, the Sauds have every reason in the world to deceive us and themselves about their proven reserves and their capacity to extract.
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