Want Cheap Oil? Reduce Demand!

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05 Jul 2008
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Ask the major oil companies or the US Department of Energy why oil prices are beyond ludicrous and they’ll tell you there’s plenty of oil out there, there’s just a lack of investment in exploration and production—particularly on the part of the national oil companies in OPEC.

Funny, the level of investment in the global oil industry hasn’t dropped off a cliff lately. Yet oil prices have shot up like asparagus in April. What’s going on here?

What the experts are really telling us is that a higher level of investment is needed now than was the case previously in order to produce the same increment of new oil.

Hmmm. Let’s drill deeper, metaphorically speaking.

In fact there’s still oil being produced today that could profitably be sold for $30 a barrel. Quite a lot of it. But—crucially—there’s not nearly enough to meet the demand that would exist if all oil were selling at such a price. That $30 oil comes from super-giant oilfields discovered back in the 1950s, ’60s, and ’70s. The industry just doesn’t find oilfields like that anymore, and the old stalwarts are now entering their retirement years and seeing declining rates of production. Now what’s available for prospecting are plays in ultra-deep water, where it costs a half million dollars a day just to rent a specialized drilling rig (of which there are only a few in existence). We’re talking NASA moon-shot level of technology here. That’s not $30 oil; it’s $75, $100, or $150 oil. No one would be interested in it, except for the fact that $30 oil is getting so scarce.

If you prefer, there is lots of stuff that’s not really oil (tar sands) that can be turned into a synthetic liquid fuel, but it takes heaps of other resources to help the process along. So of course the dollar cost for the finished product is high—and it just keeps getting higher as the price of regular oil climbs, because some of the resources required to make this synthetic fuel are effectively tied to the price of oil. No answer there.

All of this helps explain the enigmatic response of the Saudis when they’re asked, on bended knee, by folks like George W. Bush to please, please produce a little extra oil so as to drive down the world price. The Saudis tell us that the market is in fact well supplied—there is no shortage of crude. Well, they’re right: there’s no shortage of $150 oil. Sure, they’re still producing oil that costs them less than $30 to pump, but they’re producing about all of that cheap oil they can. And anyway, the price of a particular shipment isn’t determined by its cost of production; it is set more by the cost of the incremental extra barrel produced somewhere else in the world that someone is willing to pay for. If the world’s refiners (and ultimately the world’s motorists) are willing to pay $150 or $200 or $300 a barrel for oil from ultra-expensive new wells off the coast of Brazil or future ones off California or in ANWR, that’s what the price will be—for all the oil that’s coming to market.

Meanwhile, high oil prices are already killing the airline industry, the automobile industry, the trucking industry, the fishing industry, tourism…the list goes on. In effect, the world is teetering on the brink of a Greater Depression because there’s not enough $30 oil to go around anymore.

So here’s the solution: We could reduce the price of oil just by reducing demand. If the world could be satisfied with the amount of oil that can still be produced cheaply ($30 is an arbitrary figure—by now $130 oil sounds cheap), then the price would fall to that level. We’d have to keep reducing demand to maintain that price since the cheaper oil continues to deplete.

But there’s a problem to that solution: the most likely way that global demand will be reined in is by economic contraction brought on by high prices. That’s a nice way of saying bankruptcy, unemployment, and industrial collapse. It sounds bad, but that’s not the problem; the problem is this: once the price falls by any significant amount, demand will just pick back up again and we’ll be right back where we are now—with prices aiming for Alpha Centauri.

Or, we could hope for a cheaper, more convenient source of energy that would reduce demand for oil painlessly. But since no one has invented one yet, we can’t really bank on it happening (though throwing a few extra tens of billions toward energy research is not a bad idea).

In other words, there is no existing market-based fix for the fix we’re in.

Which means there is really only one way to get the price of oil down over the long term. That is to implement some kind of global agreement to ration oil consumption by quota, so as to reduce demand artificially. Just reducing demand in one country won’t help much, because some other country will quickly take up the slack. No, we all go on a diet together.

Everyone would kick and scream—but no louder than they’re currently doing. We already have rationing after all; it’s called price rationing. And price rationing simply ensures that poorer potential buyers are priced out of the market first (that’s why countries in sub-Saharan Africa are now verging on economic oblivion: they can’t afford oil to grow crops, transport goods, or operate the diesel generators that supply municipal power grids). To rich folks, price rationing may initially sound like the better deal, but they have to live in communities too, and if Orange County is going Mad Max, daily life even in a mansion behind an electric fence starts to be a bit of a bother.

Quota rationing is something North Americans haven’t faced since the 1940s—when it worked successfully to conserve fuel for the war effort. But it has also been used in other countries when supplies of fuel or electricity or water ran seriously low. Typically, quota rationing averts cutthroat competition while appealing to people’s community spirit. Nobody has as much as they want, but everybody has enough to get by.

On a global level, the quota agreement might be as simple as this: each country would agree to reduce its oil consumption by three percent per year (which is a little more than the world oil depletion rate). Then national governments would be free to find their own ways to implement that cut domestically—whether through fuel taxes, investments in efficiency, or personal quota rationing.

A global Oil Depletion Protocol is impractical, you say? Could never be negotiated? Of course it would be a tough bargain to accept. The alternative is even tougher, though.

Imagine the world without such a Protocol. Continually soaring prices will be a given. But for an increasing number of countries and potential users, this will translate into shortages. As in: the gas station down the street doesn’t have any fuel this week because the station owner can’t afford to pay cash on delivery (this is already starting to happen right here in the wealthy US of A). Worse, perhaps: nations will be tempted to secure essential fuel by military action or covert subterfuge. Just how well this is likely to work we may judge by events in Iraq over the past few years.

How badly do we want cheaper oil? Badly enough to cooperate internationally? Badly enough to lower our consumption? As soon as we want it that badly, we’ll have it. Until then, the market rules. Welcome aboard the oil-price escalator.

 

Richard Heinberg is a Senior Fellow of Post Carbon Institute and the author of The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism and Economic Collapse. www.OilDepletionProtocol.org


Reducing demand will help a tiny amount

According to Matthew Simmons, global oil production is now declining, from 85 million barrels per day to 60 million barrels per day by 2015. At the same time demand will increase 14%. This is like a 45% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted. And the U.S. is 1/4 of global consumption. If we conserve a little, that amount will be consumed by the other 3/4s of global consumption. We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from "outside," and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems. This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: http://www.peakoilassociates.com/POAnalysis.html