Diary

Energy Price Drop Foreseen

Below is an editorial from my website from May 29, during the height of hysteria over the crude oil price run-up, when some in the media were predicting $10 a gallon gasoline. Gasoline is today below $3 a gallon in many parts of the country:

The run-up in crude oil prices has many people buzzing about worst-case scenarios like $10 a gallon gasoline. But as we saw in the housing market, what goes up indeed can come down, sometimes precipitously. And the price of our fossil energy easily could come down again if we get sensible about how we extract and use it.

Geneva-based PetroLogistics has given the first optimistic sign in months about crude oil, saying that increasing production in countries like Nigeria, Saudi Arabia and Iraq is helping to raise world supply and bring down prices.

“There is a strong rebound in supply,” said PetroLogistics president Conrad Gerber.

Saudi has upped its production 300,000 barrels per day, Nigeria 200,000 and Iraq has added 300,000. Azerbaijan and Sudan also are expected to increase output. Brazil is bringing new supplies online while American exploration is turning up plenty of new sources, including 16 billion barrels in one strike in the western Gulf of Mexico and a 4-billion barrel bonanza in… North Dakota?!… all good news for the near term, and the long term too.

In addition, a global economic slowdown is cutting demand and thus reducing price pressures, while Americans’ usage patterns have shifted, dampening demand in response to $4 a gallon at the pump.

The recent spike has been attributed to tight supplies that have attracted investors into the oil futures market, keeping those markets fueled. The talk about speculators driving up prices is overblown, however. And the quickest way to send speculators scurrying it to increase worldwide supplies to cool the market. Currently worldwide demand is 85.75 million barrels per day, while April supply was 86.8, said PetroLogistics.

And OPEC says that current supplies now are slightly above the 5-year average, with 53 days’ worth on hand. The spike in crude prices could last another 6 months, however, because of market momentum. But after that, the trend could well be lower, said PetroLogistics.

A recent Lehman Brothers report said that an array of commodity index futures have skyrocketed in the last two years in what the report called “a classic asset bubble”. And bubbles do burst.

What this all means is that the hysteria about oil prices – the show-trials of oil executives before Congress; the doomsday prophecies by environmentalists; the handwringing over the future of the American economy – all is completely exaggerated.

In fact we are seeing markets working well, as they always do. The famed Scottish economist Adam Smith talked about ‘the invisible hand’ of the market directing economic forces, and today the invisible hand is indicating some scarcity that is causing much disruption and even more anxiety. Truth be told, the oil spikes are being caused by very small imbalances in supply and demand, not world-shaking shortfalls. And we can de-spike the markets by acting sensibly about supply, and not panicking.

According to Nansen Saleri, formerly head of reservoir management for Saudi Aramco, mankind has used about 7% of the known petroleum reserves in the earth. And since most of the planet is unexplored (the deep oceans, Antarctica, Greenland etc.), underexplored (Russia, the United States, etc.) or is not using the latest technology to get maximum potential out of existing wells (Mexico, Russia) we can rest assured that there are many centuries worth of supply underground, much that we do not even yet know about.

Should we exploit every last drop of oil and leave none for the future?

No. But then again, we should not be so afraid to continue to use the supplies that we know exist.

Right now, the worldwide oil market is reacting rationally. Shortages in supply are pushing up crude oil prices, cutting demand and spurring more exploration and production. After all, if you’ve got it and its value rises, then tap it. But another upside of the market’s magic is that the current price spike is causing Americans to re-think the way we find and use energy, and that is a good thing.

While indeed the United States uses the world’s oil supplies liberally, it is the American economy that drives the world economy. We currently produce 25% of the world’s finished goods. We export our technologies to make life better for all the people. And American oil companies developed virtually all the technologies that have made The Petroleum Age possible. So there are many reasons we should feel free to use our abundant fossil fuels.

The market, however, through prices, currently is telling us to conserve. And its ‘invisible hand’ is presenting us with some interesting questions. For instance: Why can’t we begin to exploit more of our own massive oil resources rather than relying on foreign oil? Why can’t we conserve more energy? Why must we incessantly fly here, there and everywhere, drive hundreds of miles for a weekend jaunt, heat our entire homes to 75 degrees in winter, and cool them to 65 in summer?

In short, the ‘invisible hand’ is forcing us to think outside the proverbial box.

Aren’t less-crowded airports and less-congested highways something we thought we’d never see again? Did we ever think we’d consider drilling in Alaska? But voila, the market is presenting us with solutions. Amazing. Maybe this thing isn’t so bad!

If prices collapse and gasoline goes back to $3 a gallon, we soon will forget all that we learned in this brush with scarcity. But what this brush is doing is getting us thinking about three critical issues; developing new supplies, using energy more wisely… and maybe relaxing in our wonderful homes for the weekend and being thankful for what we have, rather than rushing off in our cars to destinations far and wide.

And that is something refreshing to ponder.

Please visit my website at www.nikitas3.com for more.