Price of Oil Drops 74% From July Peak

Amid the general wreckage of what we are pleased to call the economy, one of the most welcome trends of recent weeks continues in this Associated Press story announcing that light sweet crude fell below 37usd per barrel this morning.

I know I'm not the only one who's been enjoying filling up the gas tank for half of what I'm now used to paying, but I'm also not the only one who bought into the general trend of arguments from two or three years ago, suggesting that the increasing consumption of oil by emerging Asian economies combined with price speculation in deregulated markets were producing a sort of market synergy and generating an unprecedented, permanent new price floor for oil.

Clearly, reality has proven more complicated than such sweeping models allow, and I've lost a long-running argument with my adviser. I guess the questions that need to be answered to better understand this phenomenon are:

1. Was Asian oil consumption actually responsible for driving up market prices, or were increased prices a function of regular market fluctuations?
2. Are we actually consuming less oil now than we were a year ago? Because suddenly OPEC is talking about reducing output, rather than claiming they don't have any additional production capacity to meet our endless demand. Knowing the answer to this would go a long way toward answering question one.
3. What should we see as the fundamental price driver for oil costs at this point?

We'll be watching over upcoming weeks to provide new answers to these old questions. In the meantime, enjoy driving like it's 2001.

Pirates, Ahoy! (Again)

More pirate shenanigans off the coast of Somalia, as an oil supertanker has been hijacked – two million barrels of crude oil, according to CNN International. Pirates, of course, have been cutting quite a swath of terror through the Indian Ocean of late. It seems bizarre to imagine pirates still operating on the high seas, but here we are. They’re still holding the Ukrainian arms ship that they captured in September, along with ten other vessels in their control.

No-Bid No Go

The New York Times reports that the no-bid Iraqi oil contracts for Western oil companies have been withdrawn. It always struck me as unbelievably absurd that this kind of shameless pandering to Western oil interests ever got as far as it did. It certainly wasn’t in the best interests of the Iraqi government to hand out their most valuable resource without competitive bidding.

Of course, under the Bush Administration, no-bid contracts seem to be the order of the day. I can’t think of a legitimate reason for a government to hand out a no-bid contract. That should be a red flag for corruption. I hope that the next congress will take some steps to stop the kind of abuses that the Bush Administration has practiced in this area – I’m look at you, Haliburton. Is there any reason why a government contract should be granted without a bidding process? Remind me again who was supposed to be the party of fiscal sanity?

Drill Baby

As the election cycle has progressed, the price of gasoline has become increasingly central to the campaigns of both parties, and energy policy in the wider sense has seemed to recede to the periphery. 70% approval ratings are a powerful motivator. There are a few things I know. Petroleum is not indispensable- if we had to, we could stop using it tomorrow. Tremendous dislocation would result, but it isn't like oxygen or water. Buying it from regimes who don't necessarily like us is relevant, but not nearly so much as many politicians are claiming. The massive transfer of wealth from countries that are rich but lack oil to countries that are poor but have it may introduce new dynamics into international markets, but they hardly constitute a threat that could easily be remedied by increasing domestic oil production. Here is why- energy is about cheap. It isn't, although it probably should be, about clean or domestically produced. And it is much, much, much cheaper to buy your oil from Saudi princes who dislike you than to rely on domestic sources.

Let's test some assumptions. Who was the leading producer of refined petroleum in 1945? (Here's a hint- they produced so much, they fueled themselves and their allies in a global war effort simultaneously overrunning Europe and the Pacific.) Who today holds the world's largest petroleum reserves?

The answers, in order, are the United States and Canada.

So why do we keep buying oil from other places? US oil is usually relatively low grade, and Canadian oil is so low grade it's condensed into rocks- oil shale. Extracting the petroleum from rocks costs a fortune. In the years after 1945, oil companies began to open the first middle eastern fields, and they drove all others from the market. It is notably cheaper to haul oil up half a world away, load it into massive purpose built vessels using massive pumping and loading stations, and ship it to the far corners of the planet than to produce it locally. In the 1950's, it was so cheap France undertook a program to convert its power plants to burn imported oil- the cheapest fuel that could be found.

If we were interested in doing so, the US could reopen the fields which still contain sizable amounts of oil in Texas, Ohio, and Pennsylvania. We could start taping into the shale fields that run down into the US from the far more substantial Canadian ones. We could even adopt the Fischer-Tropsh conversion process, allowing one to transform coal into oil, albeit at tremendous financial and environmental cost. We could probably achieve something akin to "energy security." We would also probably conservatively achieve something like $15 a gallon, paralyzing the economy almost as surely as that complete removal of oil I half-seriously posited above.

We keep buying oil from the middle east because its massive fields of light, sweet crude are cheap to refine, and thus cheap to buy. A truly global infrastructure exists to move it around the world, and it is traded on what is probably the most international of markets, in which China and India may well consume continually greater shares of limited refinery capacity.

So let's hold our political discourse to a slightly higher standard. If we are going to cast international energy purchases as a threat to national security, realize that the costs of "energy security" - defined as putting it to those dangerous foreign oil pushers -could include returning the horse to American streets as a competitive alternative for short-distance commuters. Additionally, those who claim that we are in danger of exhausting the planet's supplies should refine (sorry!) their point- we are in danger of running out of cheap oil, not oil generally. Americans who think that we should be drilling in ANWAR or on the continental shelves have lost their perspective- the most wildly optimistic estimates of what might be discoverd in those places amounts to 4% of global output, and no mechanism exists to insulate that new production from the global market mentioned above. We might marginally reduce the international cost for everyone, but anyone looking for the "Made in the USA" label on their gas pump is probably certifiable.

I suspect that a large part of the blame for curent high oil prices will in later years be found to lie with the Bush administration, and their decision to deregulate oil futures markets so that anyone could buy them, rather than restricting their sales to persons who could demonstrate refinery capacity. Guess what? The number of investors in oil futures increased dramatically. I'm sure their competitive bidding to purchase oil they can only store, not process, has had no effect on short term prices...

In the longer term, however, as Chinese and Indian populations purchase their own internal combustion engines, their demand for limited resources will increase, and more expensive sources of oil may become profitable. There is a recently opened Fischer-Tropsh plant operating a couple of hundred miles north of me in Ohio, making jet fuel at something like one ton of coal to the gallon.

More to the point, we need to get back to a conversation about systemic energy problems. If it's all going to cost more, our origin point should be GREEN energy. Oil is an input- what counts is the output. If our politicians want to strike a blow for real energy security this year, they should strike it against the use of fossil fuels at all, not which bit of rock we get them out of. Before the concept of polar ice becomes a quaint memory of a former age, we should draft legislation making it much harder for any person or community to impede the construction of wind turbines. 1% of the money currently being spent in Iraq should be converted into distributing free solar panels as we rotate those units home, and the converter boxes that will put the excess energy they capture back into the grid, reducing our need to burn other fuels. People buying electric cars, or better agreeing not to own one at all, should have some sort of encouragement for doing so in their taxes. An integrated power grid with green sources at one end and electric powered vehicles and homes at the other really would free us from the Faustian bargain we have been forced into with petroleum, and really all the other fossil fuels. That is a definition of energy security the future would look back on as truly visionary.