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Kurt Cobb

Kurt Cobb

Kurt Cobb is a freelance writer and author of the peak oil-themed thriller Prelude. He speaks and writes frequently on energy and the environment and…

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The Hidden Costs Of Cheap Oil

The Hidden Costs Of Cheap Oil

As a consumer of oil, you may regard recent sharp declines in the world oil price as a blessing. But...

If you work in the oil industry, you will not.

If you work in the renewable energy industry, you will not.

If you work in the energy efficiency business, you will not.

If you work to address climate change, you will not.

If you have investments in the oil industry (and nearly everyone does through pensions or 401k plans), you will not.

If you live in a country that exports a lot of oil (not just Saudi Arabia, but Mexico, Canada and Norway, too), you will not.

The declining price of oil is supposed to have a balanced ledger of winners and losers. But we may be on our way to finding out that in the long run we will have a much larger list of losers than winners.

And, the list will lengthen if the price continues to fall, and especially if it stays down for a long time. (Low prices are not necessarily an indication of future abundance. Remember that oil reached $35 a barrel at the end of 2008 before returning to record average daily prices in 2011, 2012 and 2013).

Related: Mexico Proceeds With Oil Auction Despite Low Oil Prices

Now here is something to contemplate. Is the price of oil falling because we can no longer afford it? This is not an idle question. Record high average daily prices for oil in the last three years have been an unrecognized cause of sluggish overall worldwide economic growth. That subpar growth appears to be exhausting itself now, particularly in Asia and Europe. In dampening growth, high oil prices sowed the seeds of their own demise by ultimately dampening demand.

But, low oil prices will make it even harder to secure future oil supplies. The oil industry was already cutting back its exploration budgets before the price plunge. The industry said that there were not enough profitable prospects available even at $100 per barrel. What happens to industry exploration and development budgets with oil prices now around $60? Without exploration there can be no new production; and without new production, oil supply falls automatically.

Now, exploration and development are not being cut to zero. But they are being cut substantially. And, as with any mineral exploration, there is no guarantee of success--even less so with cutbacks. With existing oil production worldwide declining around 4 to 5 percent per year, the industry already had a huge task keeping production growth just barely positive. Now, that will be almost impossible if oil prices remain low.

What that means is supply will likely stagnate or even shrink. Barring a deep and prolonged economic slump now (which would send oil prices even lower and keep them there for some time), as demand for oil reignites, we're setting up for another big price spike later that might then send the economy off a cliff into a serious slide.

For now, those in the renewable energy business are finding it more difficult to be competitive with lower-cost oil. Energy efficiency business owners must tell their clients that many efficiency measures will have a longer payback period while oil prices stay low. Both these outcomes send us in the wrong direction.

And, there is climate change. When petroleum products are cheap, there is less incentive to use them parsimoniously. All things being equal, that means more oil products are burned which produces additional greenhouse gas emissions.

Now, regarding the financial consequences of low oil prices, one could say, "Well, if you've chosen to work in the oil industry or if you've staked your whole country's future on the price of oil, then that's just your tough luck. Some of the wealth that flowed to you is now going to start to flow back to me."

And therein lies a problem. If that money flows too quickly away from the oil industry and the major oil exporters, it could create a financial cascade in the debt markets, in the world's stock markets, in the currency markets--oh wait, it already has. The question is how far will these disruptions carry, and will they cascade in a way that leads to a recession or depression.

Related: Norway’s Oil Decline Accelerating

One can be passive in the face of such events. But, a smarter plan would be to implement something along the lines I proposed last week--an oil tariff that keeps prices high and so keeps renewables and energy efficiency attractive. In fact, a system that keeps all carbon-based fuels high-priced would do more to move the world toward a sustainable energy system than all the current renewable energy subsidies combined. And, it would prevent the kind of price manipulation now engaged in by OPEC from wreaking havoc on any plan to move toward a renewable energy society.

It is just such disruptions in the fossil fuel markets that make us believe things that aren't good for us--that we can somehow burn cheap oil and forget about climate change. That cheap oil will go on forever. That cheap oil is a sign that the marketplace solves all problems (rather than creating new problems that it can't solve by itself).

We can celebrate lower gasoline, diesel and heating oil prices now. But like any overindulgence, we will pay for it later. When a pusher offers a junkie a discount on his drugs, we shouldn't take it as an act of kindness.

By Kurt Cobb

Source - http://resourceinsights.blogspot.mx/  

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  • viet nguyen on December 15 2014 said:
    I don't think so. If the Saudi Arabia predicted and took so much money in reverses, they would bear the oil prices plunged in long period time, at least 6-8 weeks. NEXT YEAR, they will announce a meeting board, and says I will cut about 1-2 million bpd. Then the oil prices will strike dramatically, they will said "oh we did not anything, it depend on the market. What a selfish and domineering organizaton" they pretend stupid what they know exactly.

    With a big hit to American shale oil & oil industry, they can win but some get fight back into their "pocket money"
  • gary miller on December 16 2014 said:
    Nothing new here, oil/gas is a long cycle commodity. Read Daniel Yergin's two books. Prices will likely bounce upward on some short term political crisis in a producing country, but it appears we are in a secular decline, and this is the first leg of what could be a 15-20 year bear market. Look at what oil prices did from about 1984 to 2000 after the North Sea fields began producing.
  • Ron Wagner on December 16 2014 said:
    Face it, energy of all kinds will be reasonably priced from now on. Natural gas is cheaper, cleaner, and more abundant. It can replace oil for most purposes.
  • Nick D on December 16 2014 said:
    Ok, so you suggest we keep oil price high through taxation so that the people who took out massive debts (leveraged, of course) and put their money on the wrong side of the economy can stay above water?

    This is just like the idea of bailing out banks (oh wait, it is the same thing...)

    You mention OPEC manipulating prices yet you are suggesting we let politicians do the very same thing but, to the benefit of who? The people invested in 401k's are there by option. If they do not know where their money is being invested then they don't mind losing some (or all) of it.

    It is precisely this kind of mentality that leads the global economy to collapse... If you are so worried about climate change I would suggest you come up with some pollutant-free energy source instead of passing on the burden to the people who have no skin in the game (the average Joe who is filling his tank).
  • HarryFlashmanHigson on December 17 2014 said:
    Natural gas is 'cleaner'?? Do you know anything about Fracking?

    Daniel Yergin is the arch technocornucopian of all time,and he's wrong.Yes,when Alaska and the North Sea started to produce and the Saudis wanted to screw the Soviets and the 2nd oil shock had abated we had a decline in oil prices for an extended period(and I bet you thought this after the collapse in prices after oil shock 3 too!),but it's not going to happen this time.Look for the shale bubble to burst and shake out expensive producers in the US and then prices to climb to $100 again,to the profitable point for Saudi and Russia.If the price of oil is this low(below $70)in 2020,I'll eat my own genitalia!
  • Spencer G on December 31 2014 said:
    @harryflashmanhigson Natural gas IS cleaner. Do you know anything about carbon emissions?

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