Oil prices passed $100 early in the New Year which was a media event. There’s not much in the way of mysterious about this number. The move into three digits highlights the rising trend in oil prices. Let's not forget oil was $25/barrel in 2003! Not long ago at all. A way to put this trend into context is by example:
Someone earning about $20,000/year in 1970, when oil was trading at $3.18/barrel could have bought 63,000 barrels of oil. Today, that person would have to be earning $6,300,000 to acquire the same amount. (six millon!!!) This also is a great example of inflation. There is more to this equation since a large portion of one’s earnings is dedicated indirectly to buying oil, given the high oil-based energy content of every item we consume; such as food needing machines to make, or a can of soda requiring manufacture and transport.
As far as the future of oil prices, one can see that there is insufficient new capacity (oil production) to bring online to match the rise in demand. In this sense the only direction for oil prices to go is in an upward trend. An upward spike, at double the present level, is entirely possible from any number of causes (from an attack on Iran or a hurricane in the Gulf of Mexico). But on the other hand, if world recession deepens, there could be a fall in demand such that prices could collapse to half their present levels.
Here’s where the fundamental truths of our economy come into play. What we call The Oil Age opened about 150 years ago, releasing a flood of cheap energy into our lives. Today’s production is equivalent (in energy terms) to 22 billion slaves working around the clock. The resulting economic prosperity has allowed banks to lend more than they have on deposit, confident that Tomorrow’s Expansion was collateral for Today’s Debt. That’s an important point, so I’ll write it again: confident that Tomorrow’s Expansion was collateral for Today’s Debt. Aka economic growth, or capitalism – the Milton Friedman-style of economy we have today. This principal, though subject to serious error, has worked well during the First Half of the Oil Age allowing some countries to reap great prosperity.
The Second Half of the Oil Age is upon us. Marked by an event called Peak Oil. Cheap easy-to-get oil was the First Half of this age. Poke a stick in the ground in Texas in the 1800’s and the stuff would squirt you in the face. As a field is pumped, the oil mass depletes and pressure falls. Now it’s deeper down, harder to get, more sour, not so light, harder to refine ,etc… Now the cost for the same amount of oil increases in dollars, effort & resource to get. That’s the Second Half, along with the permanent decline in this most vital resource.
A combination of high prices and economic recession may well lead to a decline in world oil demand, removing pressure on oil price. The transition around Peak Oil most likely will be a time of great volatility. A point to make that makes this writer want to be shrill: The cost of production for oil HAS NOT risen in proportion to the price of oil. This is nothing but profiteering of the current situation by the major oil producers. Although it’s not entirely their fault since oil is sold on the market. The “free market” is a reflection of what we’re prepared to pay. Which does not reflect the reality of the actual production cost. We (the U.S.) seem to be prepared to pay an amazing cost for oil. The combination of warfare, foreign policy, and dollar hegemony in the oil market that surround this resource make it fairly obvious what costs we’re willing to incur.
- I would like to acknowledge the February ASPO Newsletter as the source of inspiration for this post. Much was used and paraphrased for this essay.
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