I had previously recommended A Thousand Barrels a Second as an excellent and insigtful single book to read in order to get a grasp on what is happening in the world of oil. In it, the author develops an ‘oil intensity’ index defined as the amount of increased oil consumpsion needed to grow national GDP. A value of 100 corresponds to a 1% increase in oil consumption to grow GDP by 1%. To cite a few examples off the top of my head (don’t have the book with me but I’ll confirm tonight):
USA = 40
China = 90
South Korea = 15 (was 90 until the Asian financial crisis of 1997-98)
Japan = 0
These numbers are suprisingly stable over intermediate timeframes (20-30 years) but show dramatic inflections over the course of 3-5 years. The US index was 90 until the mid 70’s – 80’s when we obsoleted oil-fired electrical generation, but we still must consume more to grow the economy. Interestingly, Japan and some European contries use no more oil today than they used in the 1970’s, so if we were to live like they do (highly utilized mass transit, very dense living), we could stop growing our oil consumption, but could we actually decrease it? I have my doubts.
Refinery capacity is definitely a problem, but if I have oil and no refineries capable of buying it, why should I expect the price of my oil to rise?
As much as I would love alternative energy sources to really take flight, there are no silver-bullet solutions to high oil prices. There is no technology today that can cheaply or easily replace our massive fossil fuel energy infastructure. There is a reason many alternatives have been on the table for 30 years or longer but remain undeveloped.
Canadian tar sands and even the Green River oil shale deposits in Colorado and Wyoming will help very little, if not make matters worse. The essence of the problem is production rate, not total reserves. Even though there is still over 1 trillion barrels of conventional and unconventional reserves, we probably cannot produce them quickly enough to meet forecasted demand. Tar sands production is a terribly slow, tremedously energy intensive process that requires large amounts of scarce fresh water and natural gas. The wasting of these resources to upgrade extremely low grade oil into marketable oil has caused Matt Simmons to remark that the process is akin to “turning gold into lead”.
I think I’m rambling at this point, so I’ll stop. I’ll say it again, I see very little long-term downside risk to the price of light-sweet crude oil.
