Cheap Oil ~ market folly

Wednesday, December 17, 2008

Cheap Oil

In one of Gregor's latest posts, he lays out a simple premise that cheap oil is incompatible with growth. He writes,

"...The price signal given to the world from oil since 2002, in a context of flat global oil production, more than strongly indicates that oil at 45.00 dollars a barrel is not even remotely close to a sustainable price–unless a collapse in global industrialism maintains for some time to come. Thus we arrive pretty easily at a conclusion many now suspect: growth and cheap oil are incompatible..."

(click to enlarge)

So, if the price of oil is dependent on supply and demand, then you have an increasingly difficult time arguing against cheap oil prices for the future. On the demand side, it would seemingly take a prolonged global recession/depression to keep demand down. On the supply side, it would mean that somewhere in the world there would need to be a discovery large enough that it could fend off demand for years to come. While this potentially could happen, the outlook for this scenario is still bleak. Just look at the chart above. While there have been some bountiful discoveries every 10 or 20 years, each subsequent discovery has provided less production than the last.

Then there is the wrench that is alternative energy. Throw that into the mix and you could potentially see it affect oil. But, the main caveat with that argument is scale. Alternative energy would take years to truly bring to scale. And, we would argue that for it to be implemented en masse, it would require high oil prices in the first place. After all, now that we're seeing relatively 'cheap oil' again these days, the alternative energy buzz has noticeably dropped off. Sure, many (us included) still advocate pushing for green energy, but the catalyst for such an event is more than simply buzz or increased awareness. It is expensive oil. Only when the masses are emptying out their pocket books for gas (as they were this past summer) does the spark ignite the fuse.

blog comments powered by Disqus