Saturday, June 07, 2008

Oil Price Breaches $139 Barrel.

I was interviewed by George Galloway (the M.P. for Bethnal Green and Bow, East London) on his radio show last night on "talkSport radio" on the subject of fuel prices and our addiction to fossil fuels. Until he mentioned it I hadn't realised that the price of crude oil had climbed back from what I suspected in my last posting to be a lull of $122 to a record high of over $139. Sorry to have been correctly suspicious about this, that it would go back up again, and I note that Morgan Stanley are predicting a rise to $150 by the beginning of July.

Part of the problem is the weak US dollar, but as I pointed out, the underpinning factor is that the world has got through most of the readily-extracted, cheap oil, and what is left will take far more effort to procure and refine, with an according cost increase. The age of cheap fuel is firmly bygone. My feeling is that the $150 barrel will arrive by the end of the year, and probably not before then, but I defer to a firm of experts such as Morgan Stanley. Goldman Sachs were predicting a $200 barrel within 24 months and I am still putting my money (figuratively at any rate) on a $200 barrel by the end of 2009. If it comes before then, I will take that as a sign either that the world oil supplies have peaked, or that relentless demand is forging an inexorable gap with supply more quickly than anticipated.

Once the production peak is reached, the gap is widened from the supply side and will become ever enlarged by the tug of war between want and yield, thus forcing the price of oil yet higher. I am comforted in a cynical way by the putative 30 billion extra barrels in the North Sea that are now reckoned, but I know full well they are going to cost - however many of them it will prove efficacious or even possible to extract, and so the inevitable knock-on effect on the price and viability of transport - especially personal transport - will tend toward curbing the extent of the latter.

Economists tend to think of resources in isolation. That each has its individual share of the market and that if the price goes up enough, the effect will be to bring more of the given resource onto the market. This is partly true, and the possibility of that extra 30 billion barrels arises because the likely returns as a consequence of rocketing oil-prices make reserves that were once uneconomic to recover - i.e. it would probably have cost money to get them out of the ground even a few years ago - now not only viable but highly profitable. It always takes resources to extract resources, however, and when I was interviewed on another radio station earlier in the week I was asked "so gas prices are rising but surely this has nothing to do with electricity, and so why are electricity prices rising too?"

I pointed out that we make increasing amounts of electricity from gas, which we need to import and at elevating prices, and so there is a simple knock-on effect in terms of costs. So it is too with fuel. If all the oil we can recover in the future depends on highly expensive engineering, at increased capital costs for rigs and platforms etc., and the need to drill in harsher climes and regions, along with political difficulties such as terrorists blowing-up oil and gas pipelines as routinely happens in some parts of the world, e.g. Nigeria and Georgia/Armenia, and higher costs of electricity, gas and fuel to run the necessary processes, there will be no more cheap fuel, with the inevitable relocalisation of civilization. I do at least hope that we manage to hold onto the latter, since it came about only at great human sacrifice.

Related Reading.
[1] "Oil prices shoot past record above $139 a barrel on weak dollar and prediction of price spike."


Anonymous said...

FYI, your article is highlighted on

Professor Chris Rhodes said...

Thanks! I also have a letter published in The Independent today, I just noticed, on the topic of the end of cheap oil and its likely consequences.


Chris Rhodes.