The Dangerous Deficiency of Oil Economics ~Published as a Guest Op/Ed 6/10/08

Published as a guest editorial in the Kansas City Star by Robert Anderson~ June 10, 2008

With oil prices spiraling up into catastrophic levels, its time to come to terms on some dire oil market fundamentals.

Due mainly to excessive fuel consumption, we have grown past the ability of the system to supply us.

Peak oil is a pending reality. It’s not a contrived shortage or a conspiracy. We are going deeper for smaller oil deposits. We aren’t discovering giant new fields like we did back in the ’50s and ’60s. And many of those are now starting to deplete.

Our current system of economics won’t solve this problem. In spite of the sky high prices, oil demand isn’t dropping globally and production is flat to lower.

In fact, our faulty economic approach got us into this energy quagmire. We’ve always subordinated energy to economics when it should have been the other way around. These current lofty energy prices are telling us that our economics of plenty are now getting trumped by basic geologic depletion.

To an economist, future dollars are always worth less because you can invest dollars and earn interest. The same applies to oil property development where taxes, interest, and other overhead expenses are incurred. You don’t want expenses going out instead of oil income coming in. So the value of future oil production gets discounted over time. This applies to little stripper wells that dot Kansas or to huge offshore rigs. Consequently, economics dictate oil should be explored, developed, produced, monetized and consumed ASAP.

There’s no incentive to retain and conserve our valuable energy resources. In fact, via tax depletion allowances, we accelerated the draining of our oil into very cheap pre-peak economics. We’ll pay more from here on out because we paid too little in the past. Cheap oil and even cheaper future oil value projections facilitated too much consumption and depletion.

Contrary to conventional economics, post-peak oil production is actually worth vastly more than pre-peak output. But this core fundamental was not even on economists’ radar screens. To them, oil was no more important than any other economic input variable. Oil was incorrectly deemed expendable and replaceable. So we developed, pumped and consumed lots of oil at economics that were too cheap and didn’t account for the true future value or pollution costs.

U.S. oil production peaked, in 1970 at less than $4 per barrel. Using the same type of faulty economics, the U.K drained most of its North Sea supplies into sub-$20 per barrel economics. We both will now import oil at $130-plus. How prudent was this?

Our economic signals encouraged maximum oil output and consumption because economics dictated some other energy supply would flow into the inevitable higher prices. It hasn’t, and it might not.

The much-heralded invisible hand of free markets has delivered too-rapid energy resource depletion, sky-high peak energy prices, pollution, oil wars and huge wealth transfers to very unsavory regimes. Unfortunately, the imperative energy solution seems to be invisible, as well.

We are bumping up against the limits to growth. We need to start acting like it.

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About OilisNotWell

I'm a proud, happy 4th generation Kansas Citian. I've been employed in downstream petroleum and biofuels for over 30 years. After eight years as a Refinery Rep and Midcontinent Marketing Manager at Wichita-based Koch Refining, I subsequently set up shop at the KC Board of Trade just off the Country Club Plaza. Back in the old pre-internet days, I actually launched the first faxed newsletter on oil markets in the world. It was highly regarded with 350 subscribers who were oil distributors, traders and oil industry executives. Subscription cost was $760/ year. I also worked for the Hermes Group which was the first Russian company to buy a seat on a U.S. commodity exchange (NYMEX). I wrote their international business expansion plan and traveled extensively throughout Russia, Ukraine and Eastern Europe. I've also literally worked for dozens of ethanol and biodiesel firms in the U.S. I enjoy spending our winters in Uruguay and Argentina when I can swing it.

Posted on June 10, 2008, in Uncategorized. Bookmark the permalink. Leave a comment.

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