Tuesday, October 12, 2004

Oil wars

There are several articles being published right now circling around an arcane problem. That the price of oil has precipitously risen, and is likely to stay "high". Over the past couple months the price has risen from around $30/barrel to over $50/barrel.

CNN [October 11, 2004]: Oil-shocked into recession? "We're the walking wounded. We've already been hit, and in the next three or four months is when we'll stumble,"

Financial Times [October 11, 2004]: Top oil groups fail to recoup exploration costs The world's biggest oil companies are failing to get value for money when they explore for new reserves ...the commercial value of oil and gas discovered over the past three years by the 10 largest listed energy groups is running well below the amount they have spent on exploration.

Here's the deal ... It's well understood that oil is critical to the U.S. economy and that rises in oil cost strongly tend to cause recessions. Witness the recessions of the 1970's coupled with the OPEC-initiated oil shocks of the same time period. More recently, in the late 1990's the price had been in the $teens and over the course of one year OPEC raised the price to around $30/barrel and shortly after that the U.S. entered a recession (which has been blamed on the .COM fizzlement, but obviously higher oil prices would have made an effect).

In the 1970's the U.S. imported 35% of its oil needs. Today it is over 60%, and growing every year because the U.S. has little reserves. We've frittered it all away on SUV's, I'm afraid.

The second article is interesting in a scarey kind of way. If the oil companies cannot earn enough revenue from their findings to pay for the exploration, then eventually they'll stop looking. That is, until the oil price becomes high enough to warrant more exploration. The article does say the oil companies are not stopping their exploration right now, but they can't continue to lose money and keep going. Eventually exploration will dry up, or else the price will have to stay higher for long enough.

In other words, there's going to be a tendency for the oil prices to stay where they are, or even be higher.


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