Thursday, November 6, 2008

The Price of Oil

Over the last year or two I have been telling people that the price of oil would head back down again, a long way down. People did not listen, they assumed that the trend was one way and that this meant up with no end. People believed that this price rise meant we were dealing with peak oil and that the economy based on oil was coming to an end.

The reality is that demand for oil rose faster than the supply could keep up with. It is not that there was no potential for more oil to come onto to the market, it was simply an issue of the lag between the demand rising and the time for new supply to come online.

The higher price of oil has reduced demand, a natural part of the economic process. This has occurred as the supply has been rising. We are also now seeing a drop in demand because of the economic uncertainty in the world.

New technologies also come into play, as an example, the production of the ethanol is now equal to about 1.9 millions barrels of oil per day. I am assuming 20 gallons of gasoline produced from each barrel of oil, if assume that you need one barrel of ethanol to equal one barrel of oil, then it is only 900 000 barrels a day. This is about 1-2% of the global oil demand. As the technology gets better and the organic material used is not corn but something more productive, in ten years would could easily see 20 million barrel of oil equivalents of ethanol being produced, or about 20% of world demand.

The problem a lot of people have had when looking at the oil prices is that they do not apply any economic analysis to the situation.

The latest spike in oil prices have pushed innovation, but it has also pushed the tar sands in Alberta. Year in and year out there are going to more development of the tar sands. Only a long period of the price of oil being below $20 a barrel will halt the expansion.

The oil era is not at an end, the only thing that can be done at this time is for governments to price the cost of removing the CO2 from oil production and oil use. A carbon tax is the way forward and is a tool that will make business more efficient. Strong price signals will impact the supply and demand for oil. Nothing else will work.

BC is the leader in this. Opposition to the carbon tax in BC only makes sense if you do not believe there is an issue with global warming. I will admit I am not entirely convinced of the case for global warming or at all convinced that global warming will have as negative impact as people are saying.

You can take action by supporting the carbon tax on this facebook group.

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