We've been watching carefully the energy markets now for several years, and learning about the mechanisms and challenges of the oil and gas delivery industry. There are several clear axioms emerging from this study that we'd like to share with you.
1. Peak Oil sounds like a crackpot theory, but it is a simple metric that tells a large part of the story. Oil discovery in terms of estimated volume accessible in ground has declined every year since 2006. This means one of two things: Either the world's oil companies have stopped looking, or they've stopped finding. I would be very surprised if they've stopped looking. After all, it is the one resource that enables their existence. Finding the oil is another matter. If you put the same resources on finding oil, and the return on those resources are less, then there might be a budding scarcity. That is the underlying question asked.
2. All scarce goods (which includes just about everything except sand, air, and mosquitos) are subject to the laws of economics. There is a price at which it does not pay to produce the stuff, and a price at which it does not make sense to buy it. Those numbers are closer together than you might think.
3. All economics markets for scarce goods have a price which is determined by supply and demand. On the supply side there are input costs, and for gasoline the most obvious ones are the cost of the oil itself, and the costs of delivering it to market. When the costs of extraction (i.e., the process of fracking for example) begin to rise, the willingness of the suppliers to sell it at the same low price diminishes rapidly. If the market conditions were such that $2.50 per gallon gas was remotely possible, we'd put a gas station next to the Amoco that beats him every day.
4. On the demand side, there's the growing demand of the world's fastest growing automotive markets for new sources of gasoline. The oil companies have a choice of selling the gasoline here for $3.77 or trucking it to India instead and getting $6.00 for it.
It's kind of amazing that the price is as low as it is.
What would we do if gas was $6.00 a gallon? We might alter our trajectory a bit, but we will pay it. Why? Because it is worth it. Let's look at the "real" cost of gasoline. In pure inflation terms, we've been cruising along since 1985 with an extremely low price of gasoline.
If there is a danger sign in peak oil signals, it is that the adjustments will be harder to make the longer we wait. We have literally been borrowing and spending oil. Like money, it is only replenished through the hard work of people and their private organizations. And people will have to work harder now to extract the oil, just as people will have to work harder to pay down the enormous government deficit.
The republicans would have you believe that we can return to $2.50 gasoline. I think that is only possible in two ways: One, stop depreciating the dollar, or stop exporting as many of them as we do to OPEC. I don't think they have a realistic plan to do either.
The democrats believe that imposing some sort of forced alternative energy program is going to fix the problem. To this we offer an analogy: If you have 50 miles to go to the next gas station, and put 20 miles worth of gas into the car, how do you think that's going to turn out? If you shut off the engine of production before the oasis is reached, you don't get there at all.
Oil, and the cheap energy it provides is responsible for a remarkable period in this country's history. Inside every gadget, tool, piece of furniture, or building is enormous pools of cheap energy. It is the building block of the 20th century. In the 21st century, we are going to have to pay more for that boost. At the end of the day, would I rather pay $3.77 for a round trip to the grocery store, or would I be just as happy to walk the 20 mile round trip? No, even at $6, it's worth it.
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