Fortune: Why the oil boom will end

The fact that this is considered a news-worthy article from a major finance magazine should be considered exhibit A as to why we are all going to be economically screwed one day….

But if you stick to basic economics, it’s clear that the only question is when – not if – prices will succumb.

Of course. The question that isn’t addressed is whether the lower oil prices are accompanied by a lessening of world demand brought on by economic crisis. Anyone looking at how the stock market is reacting to a growing tide of bad news from the energy, finance and transportation sectors should know that the rationality implied by ‘basic economics’ was thrown out the window several years ago.

The oil bulls are correct in their explanations of why prices have jumped. It’s indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It’s also true that most of the world’s reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.

Interesting that the author doesn’t mention Saudi Arabia…. do they not mismanage production, or is it just impolitic to say so?

It takes a while to develop new supplies of oil, but the signs of a surge are already in place. Shale oil costing around $70 a barrel is now being produced in the Dakotas. Tar sands are attracting investment in Canada, also at around $70. New technology could soon minimize the pollution caused by producing oil from our super-plentiful supplies of coal.

AH yes… the vaunted Bakken Shale oil… it is being produced, but not in sufficient quantities to make that much of an impact on the global situation. A number of people will get wealthy off that play, but in the long run, I doubt it will make that large of an impact on the big picture. Also no mention of the scalability issues facing tar sands production. 3.2 million barrels per day sounds great, until you realize the US alone cranks through over 20 million barrels daily. Will we use tar sands & shale oil? Absolutely. We’ll probably drill in ANWR, the Florida coast and any where else we think we can extract oil from. Until I see some data suggesting otherwise, though, the best we can hope from this is slowing the decline in oil production as the large super giant fields play out. Anyone who thinks opening these fields will miraculously open a new era of cheap oil, happy motoring and even more accumulation of cheap plastic crap we irrationally seem to covet is deluding themselves.

An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry to Holiday Inns for a big price. Silver supplies poured from seemingly nowhere, out of America’s cupboards, of all places.

This argument is flawed in my opinion. While silver has numerous industrial uses, it’s not critical to the functioning of our economy like petroleum is. The amounts of silver in play and it’s usefulness pale in comparison to oil. The fact that Americans were able to empty their cupboards and thereby bring the silver bull to an end should indicate this. Oil is a different animal entirely.

And so it will be with oil. We don’t know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does.

Uh huh… We’ve scoured the globe for likely places oil can be found and have had a crappy record in the last 20-25 years in terms of finding large fields, but hey, now that prices have risen, someone will do a much better job of it! This is wishful thinking, not a solid policy for the future. The economic model may suggest such things, but it also ignores the limits of a finite world. We have issues with supply, demand and infrastructure that are very large, very complex, and very critical to the functioning of the global society we live in.

This article sounds common themes trotted out from Wall Street, economists and the major media:

“Sure, oil is overpriced, but it’s temporary. Something wonderful will happen and this will be a bad memory. Don’t worry, be happy, buy shit. Go back to sleep.”

Enough people will buy this line of thinking and do exactly that… and we will continue our sleepwalk toward the cliff.

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2 Responses to Fortune: Why the oil boom will end

  1. Chile says:

    Never understimate the lethargy of the sheople. (Or is the correct spelling “sheeple”?) Shush now, and let them get back to their shopping. Technology will surely save them.

    Yeah, right. I find it so hard not to be cynical these days…

  2. Matt says:

    Comparing silver to oil is assinine. When you use oil it’s gone. Silver is just remade into things. How can that comparison even get published? They aren’t even a similar type of material or product.

    Metals have value because they stick around. Oil holds no value other than it’s initial purpose.

    Damn idiots. I can’t believe I have a subscription to a magazine that would publish something like that.

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