Why are Oil Prices So High?

Why are oil prices so high? This is the question being asked with increasing frequency in many countries around the world. Some would have you believe that the blame should be placed on “greedy oil companies”, “Arabs”, “speculators” or “OPEC”. While speculation is happening with investors and hedge funds looking to commodities for returns that are not being seen in the stock or property markets, there are underlying fundamental reasons which mean prices are likely to stay high. Last November the International Energy Agency released its annual World Energy Outlook report. Traditionally the agency has projected energy supply based on projected demand. The agency has projected that India and China will lead the increase in energy demand making 45% of total growth. Oil imports for these two countries combined will grow to 19.1m barrels a day by 2030 compared to 5.4m barrels a day in 2006. Demand for oil will grow to 116m barrels a day by 2030, an increase of 37% on 2006 oil usage. In this report back in November the International Energy Agency warned the price of a barrel of oil could rise to $159 by 2030 due to high growth in demand. This estimate now looks very conservative. The reality is there have been some fundamental changes. Before if the United States went into recession, this would lower demand for oil and prices fell. Now with China, India and other rapidly developing nations demanding ever increasing quantities of oil a recession in America is unlikely to lead to falling oil prices like it did in the past. Were per capita oil use in China and India to reach the same level as in the United States, this would fully deplete the world’s remaining proven oil reserves in just 15 years and prospective resources, in 26 years. The other fundamental change is that there is little excess production capacity. While Saudi Arabia would like the world to think it could increase production if it deemed it “beneficial” to the stability of the market, this is just an illusion of control. The reality of the OPEC cartel is that while sticking to production quotas may have benefited the group as a whole, individual countries have always “cheated” consistently and repeatedly exceeded their production quotas. In the past this has lead to significant downward pressure on prices. This time the signs are that the world is at or near its maximum oil production capacity. Does this mean Peak Oil has arrived? In my opinion – not yet. New production will continue to come online in the coming years which is likely to raise worldwide maximum oil production. So we haven’t reached peak production… yet. What we may be experiencing is what Robert Rapier calls Peak Oil Lite , with the early effects of Peak Oil arriving. Demand is rising faster than supply. In its July 2007 report the International Energy Agency predicts OPEC spare capacity will decline to minimal levels by 2012. The lack of spare capacity means, that price volatility increases with price spikes occurring in the event of supply disruption. So what we are likely to experience prior to Peak Oil is Peak Export. According to Eugene Linden in BusinessWeek when it comes to oil our biggest concern should be the amount of “global oil available for export”. According to the Export Land Model developed by Jeffrey Brown – exports decline faster than production declines, the rate at which exports decline accelerates over time and only a small percentage of a producing country’s production is exported following peak production. According to a report in last week’s Wall Street Journal, fresh information from the US Department of Energy shows the quantity of petroleum products shipped by the top exporting countries in 2007 fell 2.5% last, while prices increased 57%. Net exports from major producers Mexico, Norway and Venezuela have fallen in every year since 2005. With the rise in prices individual producing countries in OPEC had every incentive to “cheat” and yet exports fell. The influx of wealth into the Middle East has led to a boom in domestic demand. It seems that Middle Easterners aspire to the same gas guzzlers and energy rich lifestyles as Americans. Soaring profits from high-price crude have fuelled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. In 2007 the output of the region’s six largest oil exporters – Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar – fell by 544,000 barrels a day. During the same period domestic demand increased by 318,000 barrels a day, leading to a decrease in net exports of 862,000 barrels a day. A recent report from CIBC World Markets also indicates that as much as 40% of Saudi Arabia’s expected production increases will be offset by rising internal demand by 2010, and Iranian exports will decline by more than 50% for similar reasons. Indonesia recently withdrew from OPEC as it has gone from being a net exporter of oil, to a net importer of oil. The Wall Street Journal report comments that the fall in oil exports “defies traditional market logic.” Perhaps that should be blind faith that OPEC nations can turn on the taps if prices rise “too high”. It seems even oil traders are unsure what is driving prices as according to one market analyst quoted by BBC News “we really don’t know what the fundamentals are doing at any point in time.” Much of the information on fundamental factors in the oil market is not public or freely available. In simple terms demand is outstripping supply and prices are rising. This is how the market is supposed to work. Other fossil fuel prices tend to follow oil. IEA’s latest World Energy Outlook forecasts coal is set to rocket in demand, increasing by 73% from 2005 to 2030. This means coal’s share in global energy demand will rise from 3% to 28%. It is predicted by 2015 America will go from being a net coal exporter to a net coal importer. Coal is the most carbon intensive way of generating electricity and this report predicts that rather than becoming a smaller part of the energy mix, coal is predicted to play a much bigger role. With a presidential election this year in the United States and gas prices at record levels, oil and energy in general is set to be a key issue. There is the opportunity to have a serious debate about energy – a fundamental part of our lives which has been taken for granted for far too long. However the responses from the presidential candidates so far have not been encouraging. In 2002 McCain declared that ethanol is a “giveaway to special interests in corn-growing states as the expense of the rest of the country.” In 2003 he put out a press release saying “Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality.” He went on to describe it as “highway robbery.” Hillary Clinton signed a letter saying that there is “no sound public policy reason for mandating the use of ethanol”. McCain, Clinton and Obama all seem to have drunk the ethanol Kool Aid and seen the bright white light that has converted them to E85 . In 2008 none of these presidential candidates seems to have anything negative to say about ethanol. In 2006 Barack Obama along with four Republican and one Democrat senator introduced the Coal-To-Liquid Fuel Promotion Act. There have also been accusations made against “Big Oil”, “OPEC” (including by British Prime Minister Gordon Brown) and suggestions that a “gas tax holiday” or “windfall tax” would fix everything. It’s always easier to find a scapegoat. One bandaid being suggested from some quarters, is to open up drilling in the United States in areas which are currently off limit. This would give access to 19 billion barrels of oil enough to meet US needs for approximately two-and-a-half-years or world demand for just over 7 months at current rates of consumption. To quote the head of the International Energy Agency: “All countries must take vigorous, immediate and collective action to curb runaway energy demand. The next ten years will be crucial for all countries… We need to act now to bring about a radical shift in investment in favor of cleaner, more efficient and more secure energy technologies.” Further Reading: The Ethanol Scam in ” Gusher of Lies ” You can read more on what the energy policies of McCain, Clinton and Obama should be in this Open Letter to the Next President .

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Why are Oil Prices So High?

Mixed Signals & Federal Funding for Alternative Energy Research

There have definitely been some mixed signals on alternative energy research recently. At the same time President Bush’s State of the Union address called for a 22 percent increase in federal spending to develop alternative energies, dozens of staffers and contractors for the National Renewable Energy Laboratory in Golden, Colorado, were being laid off. The disconnect was a political embarrassment for the president, so federal officials restored the laboratory’s funding, rehiring the workers who had been laid off just in time for President Bushs scheduled speech at the NREL. In his speech the President acknowledged the confusion, I recognize that there has been some interesting mixed signals when it comes to funding,” President Bush said. This comes at a time when a new national public opinion survey demonstrates overwhelming public support in the United States for government policies and investments that will support development of alternative energy sources. The survey of 1,000 registered voters was conducted by Public Opinion Strategies of Alexandria, VA, for the Energy Future Coalition. The surveys findings included: According to the survery there is nearly unanimous support for a national goal of having 25% of the United States domestic energy needs met by alternative energy by the year 2025. Ninety-eight percent of voters see this goal as important for the country, and three out of four (74%) feel that it is “very important.” Ninety percent of voters believe this goal is achievable. Similar majorities support government action to encourage greater use of renewable energy. Eighty-eight percent of voters favor financial incentives, and 92% support minimum government standards for the use of renewable energy by the private sector. Nearly all voters (98%) say the costs, such as the cost of research and development and the cost of building new renewable energy production facilities, would be worth it to get the United States to the 25% by 2025 goal. Voters consider energy to be an important issue facing the country, rating it similarly with health care, terrorism and national security, and education, and ahead of taxes and the war in Iraq. Half (50%) of voters believe America is headed for an energy crisis in the future, and 35% believe the country already is facing a crisis. So just how much is the United States government spending on alternative energy research? After the 22% increase the budget will stand at $771 million. This amounts to less than one percent of the $55,000 million the federal government spends annually on research, nearly half of which is devoted to healthcare. Its time for action. Source for figures on federal funding for alternative energy research President Bush’s speech at the National Renewable Energy Laboratory America’s Energy Future

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Mixed Signals & Federal Funding for Alternative Energy Research

Alternative Energy Argentina: Bringing Wind Power to Remote Areas

Max Seitz reports for the BBC that wind power is the most widespread renewable energy source in Argentina – and Patagonia in particular has extraordinary potential due to its strong and constant winds. He travelled to southern Chubut province, about 890 miles south of Buenos Aires, where wind power is making life easier for a number of isolated communities In the midst of a dark wilderness, wind-generated electricity is changing lives in the region, lighting homes and schools in remote areas. “Patagonia provides ideal conditions, unique almost, for the development of wind power,” explained Hector Mattio, Director of the Regional Centre for Wind Power (or Cree in Spanish). “We get very strong sustained winds of 11 metres per second, while in Europe they usually only reach about nine,” Mattio added. Cree – funded by the Chubut government and located in the provincial capital Rawson, near Trelew – currently has many community projects on the go to install wind generators. So far, more than 300 isolated rural villages in Chubut have received small wind turbines which provide them with light, communication and power for domestic electric appliances. A 66-year-old Araucano Indian, Julian Ibanez, welcomed us to his stone-built house. Julian owns horses and sheep but his prize possession is a three-blade, 12-metre high wind turbine with 600-watt power (the equivalent of 10 light bulbs). Like others in the region, he simply calls it the “windmill”. “They installed the windmill a while ago now and it’s changed our lives. We didn’t have electricity before, just a kerosene lamp and that was it; now we have light and we can listen to the radio.” Julian led me to a plain bedroom, where he had a fuse box attached to the wall and a 12-volt car battery, and explained how everything worked. The wind turns the windmill blades and a cable takes the energy produced into the house. The fuse box controls the voltage and battery charge. Marcos added that the electrical supply is constant – whether it comes directly from the generator or, when there is no wind, from what has been stored by the accumulator. Some dwellings have installed an inverter, a gadget to transform a 12 volt output into 220 volts – ideal for domestic appliances. Another inhabitant of the area, 30-year-old Adelino Cual, also an Araucano, had this to say: “We have electricity 24 hours a day, not just the little lamp we had before. We no longer have to buy kerosene or gas-oil. It works out cheaper for us.” The engineers had shown him how to work and maintain the generator and the fuse box: “They taught me, for example, how to change the fuses if they blow; I’ve changed them several times,” he said. And Marcos added that the idea is for those benefiting from the technology to be self-sufficient. After visiting the hamlets around about, we made our way to the heart of Chacay Oeste, which comprises a dozen or so houses and a school-shelter which accommodates some 30 pupils from neighbouring settlements. The school has been provided with six wind turbines, installed by Cree in the highest part of the town. “They provide energy for our building, for the shelter and also the teachers’ houses. During the school holidays, they are used to supply energy to the rest of the village”. Before turbines were installed, Chacay Oeste got its electricity from a petrol generator, the noise of which had become part of the landscape for the locals. “The windmills have changed things a lot for the youngsters. Now they have access to computers, and teachers can educate them through television programmes.” “Now I feel I communicate more with other people. Not like before – we were a bit unsociable,” Julian confessed after telling me that he regularly listens to the radio to find out what is going on, and that he really appreciates the Cree technicians’ visits. And at Cree they confirm that this is indeed what it is all about: The social impact the technology has had on the communities has helped to integrate them more. Full BBC Article

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Alternative Energy Argentina: Bringing Wind Power to Remote Areas