The Price of Oil is Scary

So have you noticed the price of oil lately? Pretty great eh? Cheap gas! Yee ha!gaspistol

I think not. I don’t think this is a good thing. I guess I’m a glass-half-empty kind of guy but I think something is amiss and I don’t think it’s going to end well.

A barrel of oil has stayed above $100/barrel for quite a while now. Then last summer it started this crazy nosedive to its current level of about $50. And it frankly just doesn’t make any sense to me, on so many levels.

First off, it is just such an amazing commodity; it shouldn’t be this cheap. The potential energy in a barrel of oil is mind-boggling. Three tablespoons of oil is the equivalent of a human working manually for 8 hours. If you spent your whole life toiling in the fields (which I lovingly do every summer) your whole life’s energy expenditure would be equivalent to 3 barrels of oil. 3 barrels. So if the world is burning through 80+ million barrels of oil everyday, you can appreciate just how much work that fossil fuel is accomplishing for us.

Now some (like me) would argue that much of it is wasted commuting long distances or flying to exotic places. Some would argue (like me) that we have to burn less of the stuff because when you use a liquid hydrocarbon like this, it releases sequestered carbon from under the ground into the atmosphere, and on a large scale that’s not a good thing. Some organizations like 350.org or even the International Energy Agency (IEA) suggest that if we want to have any hope of stopping the planet from warming more than 2°C we basically need to leave three-quarters of the known fossil fuel reserves that energy companies have on their balance sheets, in the ground.

And that’s one of the biggest problems with cheap oil. Some countries seem to be pumping it likes there’s no tomorrow, to generate cash, and this stuff is too precious to sell at a discount.petrol-pump-icon

There are lots of great theories as to why the price has collapsed the way it has. One is that countries are trying to punish Russia, which relies heavily on oil revenue, for it’s incursion into the Ukraine. I tend to take the more classic economic perspective and that is that demand is simply not there. The media loves to remind us of how great the economy is doing and why we should be so confident and get out there and run those credit cards up making ourselves happy. But I don’t things are as rosy as we’re being told. And I think the plummeting price of oil is the proof.

There is a hard cold reality of cheap oil and that is that many North American producers are no longer profitable. Fracked shale oil and Alberta tar sands oil are really expensive to get at. At $120/barrel there is an economic incentive to do this. At $60/barrel, well, not so much. And some of these investments we’re talking about are long term. So if you take drill rigs out of the fields and scale back investment in looking for new supplies, eventually you’ll have a drop in supply, which should bring the price back up. But I don’t think you can replace lost supply that quickly which means a huge price spike later on. More pain after the short-term gain we’re experiencing.

In a perfect world the price of oil would have just kept going up indefinitely. This would destroy demand and get consumers to switch to alternatives, many of which use free energy, like the sun and wind. A high price of oil is good for the environment. But economics being what it is, this whole supply and demand thing doesn’t seem to fit with an ever-increasing price of a commodity. Sooner or later the bubble bursts and prices come back down to earth. And customers shopping for new cars see cheap gas and buy big honking’ vehicles that will be on the road for 15 or 20 years. (These same consumers will be on the nightly news when gas goes back up in price complaining at the cost of filling up their inefficient vehicles!)

I may be out in left field on this one; in fact I’m sure I am. I simply can’t understand how such an abrupt price drop in oil can be a good thing over the long haul. Something’s up. I just can’t get my head around exactly what that is. But I don’t think it’s a good thing. Or, quoting the title of my friend Joe Ollman’s book “This will all end in tears.”

 

9 Responses to “The Price of Oil is Scary”

  • Bruce Hampson:

    I find it incomprehensible that since the price of gasoline has started to come down, the number one new vehicle sale is pickups. Trucks have not been best sellers since gas was cheap before our latest depression. Don’t people realize that the price will go back up and they will be stuck with high gas prices again. How will they afford to drive? The price of oil is being manipulated for political reasons by the Saudis.

  • Jim:

    I am in the country in Oz. Our diesel price has fallen from $1.59 to $1.44 per litre (not gallon)in the last month while in Sydney some petrol prices have fallen to $0.99 per litre.
    We have no idea either why it has fallen considering all the things happening around the earth. The official spin doesn’t make sense.

  • Rick:

    Hey Cam,

    If you listen to the MSM, and I know you don’t, nor do I. But, the reality is simple in my book. The world is in deflation mode. Some areas in the US, are insulated by this, but not the norm. And many of my friends don’t understand, they just see cheap gas prices as a good thing.

    If you follow Nicole Foss, or Max Kaiser they will both point to deflation as the root cause.

    Finally, I decided to no longer listen to doomers, anywhere. The Web has made it possible for anyone to get their message out, right or wrong. And there has always been doomers, and always will be. Saying that, I decided life is too short, to listen to them. And only control what you can, and not worry about what you can’t control.

    I don’t consider you a doomer btw. I do, when it comes to Nicole and Max. And a few others, but they sell doom for a living, which is sick. Oh well.

  • Gotta agree with you and all of the other comments. I remember last time gas prices came down in the middle of people buying up fuel efficient cars and manufacturers experimenting with electric vehicle (remember the ev one). All of a sudden people started buying things like the Hummer. eek! Here in Washington when you look at the cars on the road there are a lot of Priuses, and small cars. I have a pick up only because I use it for hauling stuff like gravel and soil but I also don’t drive very far. However my husband drives 20 minutes each way to work in the jeep. Personally I would love to be able to afford a Chevy volt. Yep, something is up and it doesn’t bode well.

  • When the price of oil started plummeting, it brought to mind a line from the first Star Wars movie when one of the Jedi Knights said “I sense a great disturbance in the Force”. Well, I sense a great disturbance in the Force right now. I don’t know where these low oil prices (not seen for several years) are taking us, but I have a feeling it’s not to anywhere good, despite popular sentiment to the contrary. I think historians of the future will identify this period as a watershed between what went before, and what came after, and it’s the “what comes after” bit which I am worried about right now.

  • Catherine:

    I have the same sense of waiting for the other shoe to drop. Not long ago, in an article I was reading about the current economic conditions in the US and the world, it stated that one of the sure signs of a failing economy was a sudden drop in gas prices. The author said it’s a last ditch “shot in the arm” to get the economy moving by getting people moving (and hopefully, spending money). I kind of wonder if that’s what we’re in and no one’s saying anything. This is just toooo spooky, Cam. I’m not allowing myself to relax or be conned into thinking that things are getting better. That may make me a conspiracy theorist, but I have the sense that all who would call me that are the ones that are going to be sorrily surprised when all goes down the drain.

  • ellen:

    Your logic appears to be along the same lines as this article and I would agree that something is going on…and it will not end well. http://oilprice.com/Energy/Oil-Prices/Ten-Reasons-Why-A-Sustained-Drop-In-Oil-Prices-Could-Be-Catastrophic.html

  • Melanie Ann MacKenzie:

    I agree with what you have said. We heat our home with wood, drive a hybrid car and since we live right out in the country, like you, I try to limit my trips to the nearest town which is 25 minutes away to no more than once a week. I do the banking, groceries, and run any other errands in one trip. Thats it. I will admit that it is nice to fill up the Honda for less money and we have had to run our generator more this winter (we are off grid) due to lack of sunshine but the decrease in the price of gas has not changed anything at all in the way we live. We are just waiting for the other shoe to drop and yes, you are right, it will all end it tears as it so often does.

  • Where I live gas is $1.36-$1.39/gallon. A tank of gas in my truck lasts a month since I only go to town twice a month. But I do not believe these low prices will last.

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Cam Mather and his wife Michelle live independently off the electricity grid using the sun and wind to power their home and their CSA. Cam is working towards the goal of making his home “zero-carbon” and with his extensive garden he aims to grow as much of his own food as possible. He is available to speak at conferences and other events and has motivated many people to integrate renewable energy into their lives, reduce their footprint on the planet and get started on the path to personal food, fuel and financial independence.
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