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THIS may
sound like putting on a brave face before the stark
reality of runaway oil prices. But if there is talk
today of oil hitting over $200 a barrel, there is also
earnest talk that, sooner or later, oil prices will
tank. I count myself among those who anticipate a fall
in oil prices to below $100 a barrel.
Oil
producers, of course, are doing their utmost to keep oil
and gas prices as high as possible. While Saudi Arabia
poses as the good cop, other producers play the bad cop.
The latter attitude is exemplified by Alexey Miller of
Gazprom. He predicts and prays that the price of oil
will reach $250 a barrel next year.
That
greed will not be sated, if we are to believe experts
and analysts who track trends and developments in the
energy market.
Not if,
but when
Shawn
Tully, editor at large of Fortune, says “the only
question is when—not if—oil prices will succumb.”
The
explanations of why prices have jumped to a record level
this month—strong growth in China, India and the Middle
East, and production mismanagement in Russia and
Venezuela—are correct. “But rather than forming a
permanent new plateau for prices,” he says, “those
forces are causing a classically unstable market that’s
destined for a steep fall.”
He
compares this development with what happened in the US
housing market, which witnessed a huge rise in prices
from frenzied buying only to collapse from overbuilding
of houses. The price spike bore no relation to the
actual cost of buying and improving land, or
constructing and marketing a new house.
The same
is true with oil today. According to Stephen Brown, an
economist at the Dallas Federal Reserve, the market
price of oil today no longer bears any relation to the
actual cost of producing a barrel of oil, which is way
below $50 a barrel. When the price is $140, the
incentive to pour out more oil is irresistible.
It takes
a while to develop new supplies of oil, but the signs of
a surge are already in place. Shale oil costing around
$70 a barrel is now being produced in the Dakotas. Tar
sands are attracting investment in Canada, also at
around $70. New technology could soon minimize the
pollution caused by producing oil from coal. And then
there is the fresh push for wind, solar and nuclear
energy.
That’s
just the supply side. Demand should start to decline, as
well, albeit more gradually. Historically, the oil
market underanticipates the amount of conservation
brought on by high prices. But now, the sales of big
cars are collapsing. People are cutting down on driving.
The airlines are scaling back flights.
Hence,
Tully says it’s possible that “a few years hence, we
could see a sustained period of plentiful oil supplies
and low prices, meaning $50 or below.”
He
acutely remembers a similar scenario following the price
explosion in the 1970s and early 1980s. The price spike
caused the world to cut back sharply on oil consumption.
By the mid-1980s, oil prices had fallen from almost $40
to around $15. They remained extremely low for two
decades.
Oil in
its proper place
Another
factor that will weigh heavily on oil prices is the
concerted action of oil-consuming nations, especially
the United States, against onerous prices. With crude at
$140 a barrel and gas prices at $5 a gallon, the biggest
user of oil in the planet is finally waking up.
Political analyst Dick Morris says oil is the defining
issue in the US elections this year. He writes, “For
decades, Americans have dragged their feet when it comes
to switching their cars, leaving their SUVs at home and
backing alternative-energy development and new oil
drilling. But the recent shock of a massive surge in oil
and gasoline prices has awakened the nation from its
complaisance. The soaring prices are the equivalent of
Pearl Harbor in jolting us out of our trance when it
comes to energy.
“Suddenly, everything is on the table. Offshore
drilling, Alaska drilling, nuclear power, wind, solar,
flex-fuel cars, plug-in cars are all increasingly
attractive options. . . .
“The
Saudis have made a fatal mistake in not forcing down the
price of oil. We could have gone for decades as their
hostage, letting their control over our oil supplies
choke us while enriching them. But they got greedy and
let the price skyrocket. The sudden shock, which has
sent America reeling, is just the stimulus we need for a
massive movement away from imported oil and toward new
types of cars.”
The
larger reality is that the United States will not be
alone in battling high oil prices. If there is a
producers’ cartel in oil today, it is not far-fetched to
imagine a union of consumers led by the United States,
China, Europe and India. Nightmarish oil prices could
sire it.
Likewise, energy analysts have noted the big shift from
fuel to electricity. In 1950, 20 percent of US economic
output was powered by electricity. Today that number is
60 percent—and rising fast. All the growth sectors, from
technology to services, are powered by the grid, not
gasoline.
Fareed
Zakaria of Newsweek says: “Petrol is increasingly
confined to one pivotal sector—transportation. But even
in this sector, the future is electric. Within 10 to 20
years, depending on market forces and government
efforts, hybrid electric motors will replace the
internal-combustion engine.”
When
that comes to pass, he concludes, “neither oil nor oil
companies and states will disappear. But they will go
from being the lifeblood of the industrial world to just
one of its many sources of energy. After a century and a
half, oil will be put in its proper place.”
To which
I say, Hallelujah. Amen. |
