Posted by: gaiusc | 27 July, 2008

Oil and why it’s going to stay expensive

It can be frustrating being an engineer sometimes. You are blessed with clarity of vision and the analytical mind required to solve problems but you lack social & communication skills as well as being proud of never reading a book unless it features technological gizmos.

How then to transfer your amazing understanding of what is happening to oil prices. Ah jeeze. Enough with the sarcasm….

Prices at the pumps have been high for a while and despite a recent ease-back, they still remain high and people are clearly of the belief that more price rises are on the way. There are basically two camps at present. Some believe that this is all an asset bubble and that oil prices will crash and others believe that there are larger issues with demand & supply that will keep the price high and cause it to increase further. Personally, I’m of the belief that oil prices will continue to rise in the medium to long term and that speculation is causing some volatility with oil prices but is not the primary cause.

A breakdown of the facts:

  • With a bubble you would expect to see rising inventories of stock as people hoard oil to make hay when the price rises even further but the simple fact is that inventories are not rising.
  • More countries are turning from oil producers into oil importers. It happened to Indonesia in 2005. The UK became a net importer of oil in 2004. The North Sea oil supply was critical in supplying the oil to end the last major oil crisis.
  • Indonesian oil production versus imports

    Indonesian oil production versus imports

  • Oil is a finite resource and we are rapidly using up the easily accessible & extractable oil. The bitumen reserves in Canada which are large & very much untapped provide for a much lower return on the energy used to extract the oil. There’s a good reason nobody has tried to use the stuff until now. There’s no circumventing the laws of thermodynamics. The increased production costs will have be paid and it’s us who will be feeling the pinch.
  • If Saudi Arabia could increase oil production, they would have done it by now. Their production has actually been decreasing. Gwahar is in trouble and that means we are in trouble.
  • It has been frequently claimed that Russian oil production will “save” us. Fact is that Russian oil production has been decreasing since late 2007.
  • Russian oil production 2005-2008

    Russian oil production 2005-2008


    Saudi oil production 2004-2007

    Saudi oil production 2004-2007

  • China is the world’s largest country by population and with increasing economic growth their demand for oil can only grow. See this chart for an illustration of this. Even if western nations manage to economise their oil usage, the developing nations will want more oil.

This piece is an excellent analysis of the current situation and explains exactly why oil prices are so high. The sad fact is that oil prices have actually been low and are reverting to a more realistic price level. Unfortunately this is going to have a major knock-on effect elsewhere. Food prices will rise because of increased production costs as well as the madness of agricultural land being transferred into producing fuel so we can keep driving fuel inefficient cars.

Some other time, I’ll give my thoughts on what our options are and the possible implications of developments like the Iranian oil bourse.

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  1. […] Ruminations of a chrome-plated watch Tags: Current Situation, Oil Prices, […]


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