Friday, October 14, 2005

Oil costs fueling US trade deficit

There are many reasons to work to reduce oil dependency. e.g. burning oil produces carcinogenic substances, it releases excess carbon into the atmosphere causing global warming, etc.

But one really stands out in a certain way. The U.S. imports a huge majority of the oil it uses. In effect the U.S. is shoveling money into the Middle East. This makes for an untenable economic situation for the U.S.

Oil costs fuel US trade deficit (Thursday, 13 October 2005, BBC)

The deficit rose 1.8% to $59bn (£33.7bn) in August - its third highest monthly sum - as the US spent a record $17.2bn on buying crude oil supplies.

The deficit is expected to rise more substantially in September as Hurricane Katrina's economic impact is reflected in trade data for the first time.

US oil production hit a 50-year low in September as Hurricanes Katrina and Rita hit output in the Gulf of Mexico.

Average oil output totalled 4.197 million barrels last month, its lowest level since 1943.

In the current context the cost for crude oil has risen dramatically this year. First $40/barrel, then $50, then $60, and it's touched $70 a few times. What's causing this? After all, the cost of extracting oil hasn't been rising. It's about supply and demand.

First we have the worsening situation in the Middle East. The Iraq War is worsening daily, and there is the threat the war will spill over to other countries. Since it's the Middle East where the oil comes from, if the war were to damage oil deliveries then the supply would shrink. The economic law of supply/demand says the price should go up. But I don't quite understand why the price should go up before this. Maybe there's some hoarding going on? Or maybe some facilities have been shut down because of the war?

Second, there have been several majorly bad storms in oil producing areas. Most especially the hurricanes to hit the Gulf of Mexico. That's the Katrina and Rita mention in the quote above. That's shut down oil production and refining stations in the Gulf region.

But really those two things are just short term blips in a long term trend. In the long term picture oil supplies are getting harder to find, especially in the U.S. as we deplete the oil fields. The supply can do only one thing, become tighter and tighter. This can have only one long term effect, rising prices. But there's another long term effect, what do we do once the oil runs out? Oil takes a multi-million year cycle to replace. With what we've done with oil over the last 150 years, all this carbon has to settle out, become plants and animals, form huge deposits of dead organic matter, sinking into the ground, and with underground pressure and fermentation become another pool of oil that another future civilization can use to fuel their ...?what?...

But for us, if the oil runs out our society will crumble because of oil dependency.

That is, unless we wake up and find alternatives to using oil.