$100 Oil Bet Update

The "perfect storm" season has passed without $100 oil, so while I work on my concession speech, here are some optimistic observations about oil from Max Singer:

IN 1980 MOST EXPERTS agreed that oil prices could only go up. Following the panic of the Iranian revolution, the price spiked to more than $80 a barrel adjusted for inflation. I gained some notoriety at the time by publishing an article with William Brown, a Hudson Institute colleague, in the Wall Street Journal predicting that oil prices would fall in 1980 and that the 1980s would be a decade of decreasing, not increasing, oil prices. Indeed, the price fell sharply in 1980 and by the late 1980s the price had fallen to around $30 a barrel, and it dipped to around $20 in the late 90s.

Today there is a great chorus, in which New York Times columnist Thomas Friedman's voice stands out, calling upon the United States and other nations to radically reduce their oil consumption because, as Friedman and others contend, the world will soon run out. In the mean time, they say, our continued dependence on (or "addiction to") oil means a continued dependence on oil exporting countries--so many of which are run by less than democratic governments--and high energy prices of $70 a barrel, or more.

But a deeper understanding of the supply side and a longer term perspective of demand produces a different view. Between now and the middle of the century $30 is likely to be more typical of the price of a barrel of oil than $60. Most of the time sellers will be competing for buyers, not pushing them around. And the Arabs are
likely to have a smaller share of the market in the future, not a larger one. Before long the fear of Arab oil power is likely to seem unimaginably dated.

Two factors influence oil prices. First is the amount of oil in the ground. Second is the capacity of oil production and transportation facilities. Too few wells and pipelines create oil shortages, and therefore high prices, regardless of how much oil there is in the ground. For our purposes, "oil in the ground" refers to oil that investors think they can bring to market for less than $20 a barrel if things go near enough to plan. Capacity, on the other hand, refers to every element of the process from extraction to delivery, including the production of equipment associated with each element of that process.

So how much oil is out there waiting to be discovered? Chevron Corporation has been buying advertisements claiming that, "The world consumes two barrels of oil for every barrel discovered." Fortunately Chevron is only speaking the truth if you use an artificial definition of how much oil is being discovered. For example, Canada is now estimated to have 150 billion barrels of recoverable oil in their tarsands. Twenty years ago we couldn't produce that oil at competitive costs. Now we are producing a million barrels/day at a cost of about $15 each. In effect we have "discovered" 150 billion barrels of oil in Canada--more than the entire world used in the last five years--which Chevron doesn't count.

I'm still not as optimistic as Singer, and one reason is the bolded statement above. 150 billion barrels seems enormous, but it is only a 5 year supply for the world. Five years is not a long time.