Saturday, April 24, 2010

Higher Oil Prices Are in Our Future

One of the urban legends that many Americans believe is that high oil prices are caused by a vast conspiracy of oil companies and speculators.

And, of course, there is some Wall Street manipulation of oil prices. That is a given - it's like saying the sun rises in the east and sets in the west. But oil and commodities are just a sideline business for Wall Street. The manipulation in these markets pales in comparison to what goes on in the US stock and bond markets.

The point I'm trying to make is that most of the rise in oil prices is caused not by speculators, but by basic economics - rising demand and falling supply.

In fact, earlier this month the US military sounded the alarm about future oil production. The US military cautioned that excess oil production capacity could disappear within two years, with major shortages possible by 2015.

The Department of Defense report stated: "By the 2030s, demand is estimated to be nearly 50% greater than today. To meet that demand...the world would need to add roughly the equivalent of Saudi Arabia's current energy production every seven years."

The report went on: "The central problem for the coming decade will not be a lack of petroleum reserves, but rather a shortage of drilling platforms, engineers and refining capacity. Even were a concerted effort begun today to repair the shortage, it would be ten years before production could catch up with expected demand."

And I believe the military's view is rather optimistic. There is the additional problem of getting to the newly discovered oil fields, most of which are miles beneath the ocean surface. To drill one hole in these harsh conditions costs billions of dollars. That's why many oil companies have given up looking for oil and have concentrated on onshore natural gas.

The military also took the optimistic view that the world will be able to produce 118 million of barrels of oil a day. That is a pipe dream.

Currently the world produces oil at a rate somewhere in the mid-80s million barrels a day. Many industry experts, not affiliated with the oil companies, believe that oil production will peak somewhere between 90-100 million barrels a day of oil.

And don't look for the world's major oil producers to help the United States out. OPEC's focus has already shifted eastward to Asia.

Saudi Arabia already exports more oil to China that it does to the United States. And that relationship is growing daily. In addition, Saudi oil exports to India has grown sevenfold over the past decade.

And the big new oil producer on the block - Brazil - is still steaming at how the US snubbed their requests for aid in developing their oil fields and how we still block their ethanol exports with high tariffs. So Brazil has turned to China and other fellow emerging countries for oil production expertise in exchange for some of the oil produced.

This is going to leave the United States chronically short of oil and paying through the nose for the oil they do get.

And sadly, many renewable energy projects have yet to get off the ground in the United States. Read any financial publication and you will see that the leaders in renewable energy efforts are China, India, Brazil and some European nations with the US far behind.

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