Friday, December 21, 2007
Will oil prices drop back to $50?
John Cassidy argues that the sustained high oil prices of the last few years will lead to a surge in new production and substantially lower prices in the future.
The tripling of oil prices since the summer of 2003 has unleashed forces that within the next two or three years will bring oil prices tumbling back down to below $50 a barrel. Looking even further ahead, prices could easily fall to $30 a barrel or even lower. So before you trade in your Cadillac Escalade for a Toyota Prius, think twice: $1.50-a-gallon gas might not be gone forever.
Regular readers know I took that side of the action in a bet with my brother (even while lacking the courage to follow through with real investment decisions), so without actually knowing anything about energy markets my instincts tell me that Cassidy is directionally correct. I do know this, though: If he is correct the next president will both claim and get credit for the price decline with no justification whatsoever.
11 Comments:
By 
, at
Fri Dec 21, 10:20:00 AM:
By , at
Fri Dec 21, 11:13:00 AM:
Maybe down to 60-70 but that's it. From what I have read, the recent spike to ~100 was a consequence of a lot of hedge funds dealing w oil.
I work in an oil-related field, and part of my work involves forecasting future production for individual oil wells.
As regards the possibility of large oil finds reducing the price of oil to 30-50, I will relate an anecdote from 5 years ago.
When I had been forecasting for some months, my then boss asked me what I thought of the future of oil production in Texas. My reply to him was: buy a wind farm in the Permian Basin ( West Texas), which is also a substantial oil producer.
BTW, wind energy capacity in Texas has been increasing ~30% per year, and has increased by a factor of 4-5 in the last 8 years.
By 
TigerHawk, at
Fri Dec 21, 11:17:00 AM:
BT,
Interesting point on wind energy. Which way does that cut, though, on oil prices?
By Kinuachdrach, at
Fri Dec 21, 11:30:00 AM:
Interesting point on wind energy. Which way does that cut, though, on oil prices?
Let's be serious -- oil supplies about 40% of global energy demand. Wind power supplies approximately 0%.
If you take away the mandates, subsidies, and preferential pricing (and eventually they will have to go), intermittent wind power is suitable for a few niche uses.
Impact of wind power (intermittent electricity, which has to be backed up by a parallel fossil or nuclear supply) on oil prices (mainly used for transportation) -- about zero.
By TigerHawk, at
Fri Dec 21, 11:35:00 AM:
Fair enough, Kinuachdrach, but you only need a marginal impact to influence prices.
The real gains will come when we have a decent plug-in hybrid for suburban drivers. That will allow people to shift transportation power needs from oil to the electric grid and back again, depending on pricing. The photovoltaics on my house could power up my car, at least in the hot days in the summer (which also happens to be the peak driving demand). Etc.
By , at
Fri Dec 21, 11:42:00 AM:
since this thread seems to be headed towards a general discussion on energy, here's three things that i have been reading about just this week:
1. a new solar voltaic technology that doesn't use silicon, and is painted onto surfaces. google is an early investor in this company. the cost of this new technology is 1/10th of existing solutions.
2. toshiba has a line of mini-reactors (200kw) that can provide power for 40 years on a single fueling. these devices are room sized.
3. hybrid and electric cars that are actively part of the grid, providing extra capacity while not being driven.
clearly, distributed power generation is the way forward; ubiquitous energy.
from a strategic pov, it's interesting to me how the u.s. is conserving it's own oil supplies (and we have lots, maybe more than anyone else) while consuming all the cheap oil available now.
By TigerHawk, at
Fri Dec 21, 11:46:00 AM:
cjm, your last point is actually interesting. I have often wondered whether the Democrats obstructionism on drilling in the wildlife refuge is unwittingly smart from a geopolitical perspective. The longer we delay pulling it out of the ground, the more valuable it will be at the margin. There is at least an argument for draining Saudi first.
By , at
Fri Dec 21, 01:12:00 PM:
I had previously discussed wind energy in a previous thread, so I will ask readers to refer to that.
I made a mistake in the link in that thread regarding the great reduction in the cost of wind energy since 1979, so I will repeat the point.
Quick summary:
1)Wind energy is competitive in cost with other forms of electrical energy.
2) Bigger and better transmission lines to population centers are a BIG issue, because wind energy in the Great Plains, our greatest source for wind energy, isn’t where the population centers are. You can place a coal or nuclear fueled power plant a short distance from the Loop in Chicago. The wind energy source for Chicago would be North Dakota, which would entail building transmission lines.
3) Reader Kinuachdrach correctly points out that wind energy is intermittent, so it will need to be used with nuclear, coal, and gas. Improvements in energy storage, i.e. batteries, may also ameliorate the intermittent nature of wind energy.
4 Electricity generated from wind accounted for an estimated 0.7% of US electrical energy use in 2006. Were it to increase at the 2001-2006 average growth rate of 22%, this would result in a 7-fold increase in wind energy in 10 years. A 30% annual increase would result in a 13-fold increase in 10 years, were it to parallel the Texas rate.
5)TH correctly points out that electrical energy and wind energy intersect with oil use with regards to increased use of hybrid vehicles. Another place where wind energy may intersect with oil use would be in substitution. Wind energy replaces some coal-fired plants. The coal then goes into coal-oil conversion.
6)Wind energy is not THE solution, but a piece of the puzzle. By the way, the electricity used in my home comes from wind energy.
There are a lot of decisions that need to be made at the national level. The increase in wind energy in Texas is in large part, a consequence of legislation passed when Dubya was governor. It isn’t a mere matter of markets.
By , at
Fri Dec 21, 10:43:00 PM:
Well, a cynic could say that if we discover an alternative to petroleum-based energy, the economies of the Middle East will collapse overnight.
Leading to massive poverty and social disruption.
Leading to so many Islamic terrorists flying planes into our buildings in revenge that they'll have to have their own airline.
Merry Christmas.
By Kinuachdrach, at
Sat Dec 22, 01:23:00 AM:
clearly, distributed power generation is the way forward; ubiquitous energy.
Don't know about that. Economies of scale have historically favored large power generation installations -- hence centralized. Anybody today could wander down to Home Depot, buy a gasoline or diesel generator, and go off-grid. Very few people do, and those who do (e.g. remote cabins) pay a premium for their distributed generation.
It is very difficult to sort out the real economics of alternate energy sources because of mandates, tax breaks, preferential pricing, subsidies. When we see that cloudy Germany is now the prime global location for solar power, we know that things are not being driven by physical realities!
Wind & solar have only niche uses unless we also have very low-cost large-scale energy storage, which requires some currently unknown technology. Nuclear energy will not power transportation without some low-cost, light-weight, high-capacity, rapid-recharge from of energy storage, which requires technology that is not currently on the market.
We know five things for sure.
(1) Fossil fuels are finite.
(2) Apart from hydro & huclear fission, alternate energies are technologically not ready for prime time and (outside limited niches) cannot compete without direct or indirect subsidies.
(3) Conservation is good, but the billions of poor people in the world cannot conserve their way to a decent standard of living.
(4) All energy sources (including such favorites as wind, solar, ethanol) when used on the necessary very large scale will involve trade-offs and environmental damage.
(5) Shortage of energy causes the greatest environmental damage of all.
Bottom line -- we need to use known large-scale technologies such as nuclear; we need to expand & diversify research into alternate energy sources; and we need to change the obstructive legal environment, which is putting human beings at risk.
By , at
Sat Dec 22, 01:45:00 AM:
kinu: just like with computers, eh :)
