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Oil: the fly in the economic custard
Posted by: McQ on Tuesday, April 18, 2006

Oil prices are climbing and it is my guess that this is only the beginning of a steady increase in oil pricing:

Oil prices hit a new intraday high of $70.88 a barrel Tuesday amid international tension over Iran's nuclear program and worries about supply disruptions in Nigeria.


"We have broken new ground today," said Victor Shum, energy analyst with Purvin & Gertz in Singapore. "The market sentiment is bullish, with yesterday's record closing, momentum has been built up to cause a wave of buying."

The previous intraday high was set Aug. 30, when Hurricane Katrina lashed at the U.S. Gulf Coast and wreaked havoc on the region's oil industry.

Analysts said oil prices were likely to climb further as long as geopolitical risks in Iran and Nigeria posed threats to supply at a time when global demand remains strong and supplies remain tight.

Crude oil production is only barely keeping up with rising global demand, leaving a slim margin for error if there is a prolonged supply interruption, experts say.
While the article cites Iran and Nigeria as the present focus of concern, in the long run it is the building demand for oil which will keep the pricing high.

Competition for oil, worldwide, is at it's higest level ever and continuing to build, driven by the red-hot economies of China and India.
Increased demand for oil in India and China is so large they have created a worrisome climate among the world's energy producers, the chief of Saudi Arabia's services company in the United States said on Monday.

"This is the big gorilla. The demand by China and India together, if they continue to grow, it is quite substantial and it is frightening," said Mazen I. Snobar, President and CEO of Aramco Services Co., which delivers Saudi oil to the United States.
The numbers show that there's no turning back:
The world's demand for energy is doubling every 10 years and is expected to reach 230 million tons in 2010.
China is aggressively seeking new sources of oil to feed it's growing economy. Per the US Energy Information Agency, China has accounted for 40% of the increased demand over the last four years. The following chart will give you an idea as to why it seems improbable oil prices will be coming down anytimes soon:

Increased demand. Limited supply. Can anyone guess the result?
ChevronTexaco chief Dave O'Reilly has warned of a "bidding war for Middle Eastern oil between east and west".
And the result of that bidding war will be higher and higher oil pricing. The higher prices will then further effect the global economy and slow (or stop) growth. Oil's pervasive use within our economies for everything from energy to transportation needs will drive prices on goods and services higher and higher.

Then there's the aspect of using oil as a political weapon within this atmosphere of cut-throat competition. Venezuela and Iran already understand the power they control and the political heft it gives them. And so does China, who's forged agreements with both Iran and Venezuela to feed its need.

There is one silver lining to all of this if you can call it that. Obviously we could slip past this mess if we had immediate access to a renewable fuel source. But that doesn't appear to be on the horizon at this point.

Rising oil prices have, however, made economically marginal oil sources much more viable. For instance it is estimated that within the Green River Formation in Colorado, Utah and Wyoming lies 2 trillion barrels of oil. That's more crude than has been produced worldwide since petroleum began to be extracted. But until now, it's been economically unfeasible to exploit because it's locked deep in layers of oil shale.

However, Shell has now developed a method of extraction that would make a profit even at $20 to $30 dollars a barrel. The process is pretty environmentally friendly as well, eschewing the former requirement for open pit mining to actually process the shale in place.
Even if only 800 billion barrels is recoverable, as a Rand study estimated recently, that would be more than triple the proven reserves of Saudi Arabia and could fuel 25 percent of current U.S. demand for oil for another 400 years.
Canada too has unconventional sources of oil found in the oil sands of Alberta. But it costs more to extract that oil there than anywhere else in the world. Higher oil prices makes it more and more feasible. It's estimated that full exploitation by Canada of this unconventional source of oil will see Canada rise from the number 8 supplier of petroleum world-wide to number 5 by 2015.

And then there's refinery capacity. But that's another subject for another day.

Suffice it to say high oil prices are here to stay, will have a growing economic effect and will be used as a political weapon.

And the energy policy for the US? Well, along with immigration, look for that to be among the top issues when the '08 elections roll around. In the meantime, tighten your belts because it may be a bumpy ride. $100 dollar a barrel oil is not at all out of the realm of possibility ... and soon.
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Previous Comments to this Post 

It’s worthwhile to note that productivity per energy unit is higher in the US than India and China, so they suffer disproportionately more when the price goes up. Another way of putting that is the cost of the energy source (oil) is a bigger percentage of the overall cost of stuff they produce than it is for us.

The economic consequences of that for China, particularly, are worth pondering. An energy-induced recession here could conceivably result in a depression there, both because of our lessened demand for their products and the more severe economic problems that higher energy prices would impose on them.
Written By: Billy Hollis
URL: http://
Bring on the nukes! And the Heim hyperdrive.

I heard they’re planning two more plants, but really we need to build 50 or 60.

We could be doing a lot more with fuel crops, too. Brazil is reportedly close to being self-sufficient with sugar-based ethanol.
Written By: TallDave
Yeah, the good thing to come of this are the substitute products that will become much more attractive. More nuclear plants are a must. Getting rid of the death grip regulations have on oil/gas refineries is a must. I wonder how much we will have to pay for the setbacks caused by the environmental movement of the past few decades.

Of course, no one to blame the tarrifs on Brazillian sugar cane ethanol on but our own protectionist lawmakers.
Written By: Chris
URL: http://
Also, don’t forget synthetic liquid fuels from coal. The State of Montana wants in on that business given their abundant anthracite deposits. Of course, those processes greatly increase CO2 production/unit fuel energy produced so the anti-Greenhouse Effect crowd will certainly not like it.
Written By: D
URL: http://
Also, don’t forget synthetic liquid fuels from coal.
The US News article I cited talks about that, D.
Written By: McQ
"The world’s demand for energy is doubling every 10 years and is expected to reach 230 million tons in 2010."

How do you measure enery in tons? Anyway I’ve always been a strong advocate of more nuclear power. Even the enviro-moonbats are finally getting a clue. It would not directly address oil consumption as very little of our electricity is generated from oil burning power plants. However it would reduce the use of natural gas consumption for base-line power generation and that would take the pressure off of natgas prices. Also if we ever develop an electric car demand as opposed to hybrids, then nuclear power plants could provide the electricity to charge them. In this way, nuclear would impact the amount of oil used.
Written By: Paul
URL: http://
I browsed the comments on this thread to see if any of us Neo-libs are contemplating decentralized energy solutions. Nuclear transmission is an obvious national solution, but, as currently envisioned, it requires a centralized generation site, a vulnerable array of networks to conduct energy to peripheral users, and a vast regulatory regimen.

A better national design based on individual choice and market-driven product innovation would promote the development of a revolutionary "personal generation" economy, that could rival the dynamism to the modern Auto industry.

Loosely this idea would mean that individuals can choose from multiple, redundant sources of personal-generation technologies, while facing more accountability for their personal energy-use: two real conditons for an operable energy market that are sorely missing right now.

Imagine if our bodies’ cells lacked mitochondria, and instead, depended on an energy-source in the tonsils for sustenance. That’s what we’ve got right now.
Written By: Steve
URL: http://
Steve, I propose that Congress MANDATE a "Mr Fusion" in every household... your proposal was goobledy-gook... energy is produced and distributed in the manner it is, by the nature of the technolgy for it’s production. We all can’t BE energy INDEPENDENT... you propose the equivalent to the backyard steel mills of the Great Leap Forward.
Written By: Joe
URL: http://
Hmmm... Inflation is up, oil is up - maybe Bush really is Jimmy Carter.
Written By: mkultra
URL: http://
Joe, the reference to the GLF is not lost on me. But it’s a straw-man: obviously backyard iron-smelting (in ’50’s and 60’s China) was a BAD idea!

But your swipe, "I propose that Congress MANDATE a "Mr Fusion"...," invites comment.
You stick to the mandates, Joe. I’m a libertarian who favors pluralistic solutions.

And, if you weren’t sated suckling off the subsidized energy grid, you’d have already sampled the existing personal-generation market (and be better informed about its products).

The latest 4000W Onan stand-by generator purrs like Mao’s red cat and sips precious LP. A PV-array installed by an innovative neighbor is not a crude steel "factory" in a 60’s Beijing ’burb. And a home that incorporates geothermal heat-exchange and solar-heat exchange into its design wasn’t in the Dowager’s plans for her "Cultural Revolution."

Written By: Steve
URL: http://
I think higher prices of about 70-80/bbl are a good thing. They wouldnt be high enough to tank the economy, but they would encourage conservation, alternative sources, and domestic production. We have to eliminate the luddites who stand in the way of Nuclear power. And we have to some how get off of the Middle east crackpipe.
Written By: kyle N
Yeah Steve...personal power generation for the masses...I think energy production does have economies of scale. That’s my point. Everyman a power station didn’t work 100 years ago, I’m not seeing it now. It was the economy of scale that led to the "Grid System" of power distribution. If you want to try to power NYC your way, OK... heck you might be right, but I’m not holding my breath.
Written By: Joe
URL: http://
And, if you weren’t sated suckling off the subsidized energy grid, you’d have already sampled the existing personal-generation market (and be better informed about its products).
No Steve the problem is that you have to have a distribution grid of one sort or another in order to get even "personal generation" working. The electrical grid happens to be the primary distribution grid we have right now. We’ve invested a lot of good money into it and it is used almost universally. Going to distributed energy generation just means you will need whole new distribution systems to get the energy feedstocks to the homes. Instead of electrical energy through power lines you need trucks or pipes full of chemical energy going to homes. Now granted photo-voltaic and wind systems will be useful and generally not suffer these problems (because nature distributes the energy to you), but they can only be counted on to provide supplemental power.

After the last energy crisis we saw lots of people building expensive "efficient" homes looking to cash in on the minute energy generation you may get from solar-heat exchange etc. Years later most had given up on it. Someone did the math and showed them that aside from investments in good insulation and a few other concepts, most of these things were crap. You were paying more to run the plant than you were making from the energy.
Written By: Jeff the Baptist
Guys, the scale of the economy is changing.

By now we’re all familiar with the concept underlying Glenn Reynolds’ Army of Davids. We aren’t all Davids yet, but we’re still talking about it. I’m simply applying Reynolds’ atomizing and empowering concepts to energy generation.

Jeff, your point that a distribution system would still be needed is well-taken. But it misses my "plurality" point. The Personal Generation (PG) idea allows individual consumers to choose from a plurality of energy sources, of which only a few are transported fuels. PG gives the American energy consumer an array of energy sources to choose from - tranported or onsite, distant or proximal - and let’s the consumer decide which he/she want to pay for. This redundancy of sources also protects us from the frequent universal grid failures caused by cartels, sunspots, and human failure.

And please don’t be so quick to knock solar and wind generation. If you live in a place where the sun shines and the wind blows often, you can live comfortably powered by a solar/wind system with LP backup generator - and kiss the entire grid goodbye. Fer-real!

Joe, it’s OK to love NY, but I don’t live there, and I sure hope my taxes aren’t subsidizing Hillary’s heating oil bills (I know they are, but I thought I’d be cute). Having said that, one of the problems with our nation’s current energy usage is its maintenance of enourmous urban populations in frigid temperate regions.

Which brings me to another point: if the formation of dense urban communities is fueled by a centralized model of energy distribution, it seems decentralizing these networks could force a reanalysis of our current urban model. In an energy market where a clear feed-back loop feeds a cycle of social innovation and cost-efficiency, we may find that the energetics of our northern cities were never remotely sustainable.

The resulting social revolution that America would undergo may rival that which followed the construction of the interstate freeway system; as empowered American’s abandon old constructs in a display of rational consumerism.
Written By: Steve
URL: http://
Ah I see Steve, the Social Engineer... I think we’ll try to keep the current urban-centred system pretty much as it is. I’d rather not risk the GNP and lives to change things so radically.
Written By: Joe
URL: http://
"If you live in a place where the sun shines and the wind blows often, you can live comfortably powered by a solar/wind system with LP backup generator - and kiss the entire grid goodbye. Fer-real!"

And if you don’t live in such a place?

"one of the problems with our nation’s current energy usage is its maintenance of enourmous urban populations in frigid temperate regions."

What shall we do with this inconvenient population concentration?
Written By: timactual
URL: http://
Joe, cities come and go - and no-one cries a tear.

And, sure there are always nostalgics who can’t let go. But, it’s not about mandates, it’s just free people choosing to migrate to a more favorable environment.

Timactual, "And if you don’t live in such a place?"

Then move to a place with more favorable energetics. Millions do it every year. And it’s bad form to ask those who do to subsidize the construct that they fled.
(Open your minds, guys. Me thinks you’re still stuck in the 50’s.)
Written By: Steve
URL: http://

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