Tuesday, June 09, 2009

The LA Times gets it.

Oil's current low price is the result of factors that cannot hold for the long haul. this article in the LA Times touches on many things we have discussed previously, and the conclusion is the same as the one we have discussed: sooner, not later, oil prices have to go back up, even above and beyond OPEC's recent decision to set a "floor" for crude at $70-$80 per barrel.

Los Angeles Times Online
Oil: The rise and fall . . . and rise
2:07 PM, June 7, 2009
Edward Silver

The world consumes 30 billion barrels of oil a year. Without it, our food doesn’t make it to the supermarket and our flights to Hawaii are grounded...

...Even before the economic signs turned more encouraging, oil was sizzling. Prices have more than doubled since crude visited the low-$30s in February. The falling dollar has helped, as some investors have turned to raw materials as a hedge against the greenback's slide...

...Demand for crude, however, is considerably less volatile than the price. Even as the rally unfolded this spring, commentators often repeated the view that higher prices made no sense because use of the fuel had collapsed. But "collapsed" doesn’t describe a world market that will shrink a measly 3% this year to 83.2 million barrels a day, according to the International Energy Agency.

Though fewer Americans took long car trips over Memorial Day weekend, China’s 8-million-barrel-a-day habit will see a dent of only 70,000 a day this year, the IEA says. In fact, the Asian giant burned more oil this April than last April. And all those tankers filled with surplus crude that bearish observers point out? Combined, these floating warehouses hold just over a single day’s worth of global use...

...Even if U.S. oil demand doesn't rebound -- and greener cars, biofuels and conservation measures boost the chance that it won't -- the action is in the developing world. Masses continue to leave the land for the cities, where they become bona fide fossil fuel consumers. Fortunately or unfortunately, entrepreneurs and governments are trying to make that status affordable for them. Tata Motors, for its part, intends to put India’s Everyman behind the wheel of its $2,000 Nano car.

An internal-combustion engine in every Asian garage? To put it mildly, that would more than make up for the gas Americans didn’t use over Memorial Day.

Where the crude will come from to satisfy these new wants is a puzzle. Most of the cheap and easy oil has been extracted. For much of this decade, when demand already was pushing the supply envelope, drillers ventured into fields and waters that required high expense and high technology to yield their riches. Now, many of those projects have shut down...

...Even a glut doesn’t change the nature of a finite resource -- just how fast it’s depleted. One reason oil companies journeyed to second-tier sources is that formerly prolific fields are drying up. The most spectacular example: Mexico’s relatively young Cantarell field. Only a few years ago, it provided more than 2 million barrels a day, but 2009 estimates have tumbled into the 600,000 range...

...To investors seeking a natural or "fair" value for the stuff, wake up and smell the exhaust: As a practical matter, there is none, largely because of all the uncertainties in the outlook. And if there were, the momentum players who rule this murky market would pay it no mind.

But this much seems clear: The move from $33 to $68 a barrel -- during a time of surplus -- offers just a whiff of what will happen when supply tightens up again. If the recession passes and scarcity sets in, the return of energy angst, here and around the globe, will make for giddy prices in the oil market.

Peak Oil has not gone away. With so many people out of work and unable to go on vacations (not to mention watching their gas usage like a hawk even at home), our usage has dropped quite a bit. Our usage of oil may remain depressed due to high unemployment and economic hardship for years to come. But the rest of the world isn't stopping their mad quest to also use 40% of the world's available natural resources every year, just like the US does. They want our unsustainable standard of living because they believe they deserve it - we had ours, and now it's their turn. And the last time I checked, China + India + the US alone is 40+40+40 or 120% of available resources. In other words, not counting any other country in the world, if China and India shoot for a US standard of living, there will be 20% more demand than supply. It doesn't take a rocket scientist to figure out what that will do to prices - especially since supply, such as mentioned in Mexico's fields above, is dropping instead of rising.

To put it plainly, our car-centered standard of living is unsustainable even for us, much less when other countries join in. We have 5% of the world's population, as I have said many times - we don't deserve and can no longer command 40% of the world's natural resources every year. Our culture, built on radical independence and self-centeredness and instant-total-gratification (including the ability to go straight to anywhere at anytime) will have to end. Personal automobiles will become a thing affordable only to the excruciatingly wealthy when we are reduced to having only the 5% of the world's natural resources that our 5% of the world's population deserves and can afford.

And let's not forget: We have squandered 500 years of fuel for emergency service vehicles in only 100 years of personal automobile usage. Even now, instead of making an intelligent decision to fully fund and build mass transit infrastructure to live within our means (that is, America's own available oil production), we continually cling to the delusion that we have some sort of entitlement to drive where we want to go, some sort of right to not have to wait in line or plan our transit needs in advance, and some sort of special dispensation from God to ignore the needs of future generations.

So much for good stewardship. Leader of the free world? Not anymore.

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