Saturday, May 31, 2008

Why oil costs over $120 per barrel

Oil is still cheap

At $2 per liter bottled spring water costs $318 per barrel.

Oil is still very cheap. Bottled spring water at $2 per litre works out at $318 per barrel. Oil is fundamental to our lives for transportation and a myriad products ranging from plastic to pesticides. Unlike spring water, oil is finite and costs significantly more to find and produce. The price of oil will continue to rise until the world as a whole decides it can do with less or until meaningful volumes of energy substitution take root.

Secondary factors and excuses

There are a range of secondary factors impacting the day to day fluctuations in oil price such as:

  • Speculation
  • Political unrest in producing countries
  • The depreciation of the $US
  • Prime exploration acreage that is off limits to OECD corporations


Financial speculation in oil futures is being offered increasingly as the reason for high oil prices. True, speculation is rife. However, the futures market is a zero sum game. For every long position there is a short position and the price is ultimately struck by the individual who takes delivery of the oil - which is then refined and purchased by a consumer. For so long as consumers keep demanding oil at ever higher prices, the price will continue to rise.

The only way speculation could impact the oil price is under accumulation. Inventories of crude oil and refined products have been falling for a year (see figures 14 to 17).

Political unrest

True, political unrest in exporting countries such as Iraq and Nigeria means that less oil is being produced. But this situation has prevailed for many years now and is likely to get worse as energy poverty begins to bite.

The depreciation of the $US

True, the depreciation of the US$ has contributed to the rise in oil prices. But the oil price has risen in € too.

From Countdown to €100 oil by Jerome a Paris.

Off limits exploration

True, there are vast tracts of the USA that are under-explored in the ANWR and off the east and west coasts where the US has placed a high price on protecting their own environment. But it is not true that the Middle East and Russia are under-explored and that greater access to these areas by OECD companies would transform the current situation.

In summary these secondary factors touted by the MSM, politicians and oil companies are nothing more than an excuse and a distraction from the core problem which is demand growth running ahead of supply growth for over three years now. If the USA, Russia or Saudi Arabia could turn on the taps and produce an additional 3 mmbpd, the oil price would fall tomorrow. But they can't and the only way the oil price will come down is by reduced demand brought about by pricing poor people out of the energy market and by deepening recession.


We are now in the early stages of a full blown energy crisis that was predictable if not wholly avoidable. Politicians are awaking to the crisis now that escalating energy costs make its existence plain to see. It is highly unlikely that politicians will now grasp the gravity of the situation that the OECD and rest of the world faces and the responses will likely be ineffectual and too little too late.

The principal reason for current high oil price is the proximity of a peak in global oil production. Politicians must understand this and then grasp that natural gas and coal supplies will follow oil down by mid century. Reducing taxes on energy consumption right now is the wrong thing to do. Taxation structure needs to be adjusted to oblige energy producing companies to re-invest wind fall profits in alternative energy sources on a truly massive scale.

Energy efficiency should be the guiding beacon of all policy decisions and this must apply equally to energy production and energy consumption.

Posted by Euan Mearns


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