Tuesday, August 19, 2008

Declining Gas Prices?

Don't get too used to declining gas prices. By many expert opinions (alas, I am no expert, but I agree anyway) this current dip in the price of gasoline is temporary. There's an article in the New York Times today about the oil industry and their struggles to find new production sources. The general idea is that the independent oil producers, ExxonMobil, for example, while awash in profits, are struggling to open up new production. One reason is political: as more countries nationalize their oil production, they are simultaneously restricting outside investment, with the result that, for example, American companies are not so free to go exploring in Nigerian oil fields. A second reason is closely related: there are not many more big new fields to finds, so those who have them are becoming more protective. Have you heard enough rhetoric about American dependence on foreign oil? Imagine the feeling in oil-rich countries about foreign consumption of their own precious oil. Think Russia wants to sell to just anyone? Think again: it's a big power position for them to hold large reserves.
The Peak Oil folks have been saying this kind of thing for years. Many of them have predicted this kind of thing, and they are going crazy on their websites with not-so-subtle "We told you so" proclamations. See here, here, and here for examples. Many people misunderstand the idea of Peak Oil to mean that we're running out of oil. That is not the case. There will always be oil to pump. The problem is one of macro-economics. As demand grows past supply, the price will start to rise steeply. What we're going to run out of is the cheaper-than-water oil that we've built our economies around. Think there's an oil-company conspiracy? It's just the economics of natural resource depletion playing out. Here's a snippet from the article:

The scope of the supply problem became more clear in the latest quarter when the five biggest publicly traded oil companies, including Exxon Mobil, said their oil output had declined by a total of 614,000 barrels a day, even as they posted $44 billion in profits. It was the steepest of five consecutive quarters of declines.

While that drop might not sound like much in a world that consumes 86 million barrels of oil each day, today’s markets are so tight that the slightest shortfalls can push up prices.

Along with mature fields, the companies have contracts with producing countries whose governments allocate fewer barrels to oil companies as prices rise.

“It has become really, really difficult to grow production,” said Paul Horsnell, an analyst atBarclays Capital. “International companies have a portfolio of assets in areas of significant decline and no frontier discoveries to make up for that.”

One reassuring point is that at least in the developed world, people are rapidly shifting away from ridiculously conspicuous consumption. Hummer sales have plummeted, and the carmakers can hardly sell new SUV's and pickups. Almost every car ad on TV now either offers $8k-10k discounts on SUV/trucks or trumpets the high mileage of the small cars they sell. Americans have scaled way back on driving and gas consumption. That is in large part what's responsible for the current dip in prices. That and the strengthening dollar. However, in India and in China, where fuel prices are highly subsidized, demand continues to grow largely unabated, so we shouldn't expect the current decline to last.

What should we do? Remember, "where your treasure is, there also will your heart be. (Matt 16:21)" The things of this world will pass away, so focus on the heavens. In an age and culture where car/house=identity, there is a real and living Person who can give us the incorruptible life... 

Also, you can ride a bike to save money on gas. ;-)

1 comment:

paul said...

Came across this article this morning. Scary how out of touch some people can be and still be considered legitimate. http://news.yahoo.com/s/ap/20080821/ap_on_el_pr/mccain_houses