As I write this, a little after 2:00 AM, I am concerned… no, I’m petrified the U.S. financial markets will follow the rest of the world and plummet at today’s opening.
The global economy is totally interconnected. International markets fell Monday, while our stock exchange was closed. They’re falling again right now. The Dow could be down multiple hundreds of points right at the opening.
A full fledged crash is certainly possible, though I’d rather not think about it.
That’s really not what I wanted to write about, but since this will be about the international economy and oil, I thought I should acknowledge what’s going on.
Yesterday, I saw a story (in many places) about Israel’s commitment to build an electric car. Here in the states a fully electric vehicle will be out from GM in just a few years. These are fully electric cars, not hybrids.
It makes a lot of sense, because at $100 a barrel, alternative fuels become competitive with oil. Except, $100 a barrel is a totally artificial price.
Yes, there’s some supply and demand at work, but oil’s price is steered by a cartel. They control the supply to control the demand to control the price.
OPEC is not a monolith. The oil producing nations aren’t exactly in lock step. They’re close enough.
That being said, the actual cost to produce a barrel of oil is a lot less than the selling price. What it costs differs by location, but here’s what the Energy Information Administration, a US government agency, says.
In 2006, average production costs (or “lifting” costs, the cost to bring a barrel of oil to the surface) ranged from about $4 per barrel (excluding taxes) in Africa to about $8.30 per barrel in Canada; the average for the U.S. was $6.83/barrel (an increase of 23% over the $5.56/barrel cost in 2005). Besides the direct costs associated with removing the oil from the ground, substantial costs are incurred to explore for and develop oil fields (called “finding” costs), and these also vary substantially by region. Averaged over 2004, 2005 and 2006, finding costs ranged from about $5.26/barrel in the Middle East1 to $63.71/barrel for U.S. offshore.
Forget the $63.71 figure, because it represents a small portion of what’s being produced. By and large, most of the world’s oil is found and removed at $10-$20 per barrel. Obviously, the oil exporting nations are getting rich and their selling price has little to do with their actual cost.
However, in the face of competition from alternative energy (think electric cars) they can and will reevaluate their price, settling for less in the short run to guarantee a continuing market for their products.
Oil exporters don’t want coal, solar, nuclear, or whatever else can be thought up, to kill their business. That leaves us with tough decisions.
Do we want energy independence and, if so, at what cost?
My feeling is, we need to be independent and must be willing to make short term economic sacrifices to establish an energy beachhead. In the long term, an economically weakened OPEC, which can no longer run roughshod over energy prices, is in our best interest.
It won’t be easy. At some point, whether through consumer persistence or governmental subsidy, we’re going to have to endure short term pain in order to free ourselves. OPEC will do their best to temp us by cutting their prices. And, as has always been the case, more oil will be found to quench the world’s growing thirst.
Will we continue to look to alternatives if oil returns to a ‘reasonable’ price? There’s certainly lots of fudge factor in what they’re getting now.
I hope we can resist their temptation.