If the speculators are not to blame, what about the oil companies, which have failed to increase output in spite of record profits? Profiteering, say some. However, that accusation doesn't stand up to much scrutiny either. The oil price is set in a market. For Shell, Exxon et al to hoard oil underground would be to leave billions of dollars of investment languishing unused. Others fear that oil is pricey because it is running out. But there is little evidence to support the doctrine of “peak oil” in its extreme form. The Middle East still seems to contain a sea of the stuff. Even if new finds elsewhere have been rarer and less accessible than in the past, vast quantities of oil could now be profitably stripped from tar sands and shale.

The truth is more prosaic. Finding and developing new oil fields is an expensive and time-consuming business. The giant new fields in the deep water off Brazil are unlikely to produce oil for a decade or more. Furthermore, oil is perverse. When prices are low, oil-rich countries welcome the low-cost, high-tech and well-capitalised oil firms. When prices are high, countries like Russia and Venezuela kick them out again. Likewise the engineers, survey ships and seismic rigs that oil firms need to find and produce new deposits are expensive right now. The costs of finding oil have, temporarily, doubled precisely because everybody wants to give them work.

So the oil shock will take time to abate. Some greens may welcome that, seeing three-figure oil as a way of limiting greenhouse emissions. Conservation will indeed increase. But everything high prices achieve could be done better by sensible carbon taxes. As well as curbing oil use, high prices have put tar sands in business which create far more carbon dioxide than conventional oil. Profits are going to ugly oil-fed regimes, not Western exchequers. And the wild unpredictability of prices will blunt the effect of dear oil on people's behaviour.

From this perspective, governments should speed up the adjustment—or at least stop delaying it.

Read it all.

Filed under: * Economics, Politics • Economy • Energy, Natural Resources

1. libraryjim wrote: We’ve heard this before—in the Carter years during the last ‘oil crisis’.  This, too, will abate, Global warming will be proven to be a natural cycle, and Congress and the American People will forget that they ever sensed a need to conserve or find alternate energy sources—until the next ‘oil crisis’.  The only certain thing is that all the tax increases Congress will pass due to G.W. fears and oil shortages will stay in place. May 31, 12:26 pm | [comment link]

2. Baruch wrote: Many countries control the amount to be produced, US production is controled by the governments control of leases in areas where large potential is available. Produced oil can only be of use if it is refined and there hasn’t been a new refinery allowed in the US for about 30 - 35 years, the NIMBY problem. Our refineries require generally sweet crude and a lot of the production from many areas does not meet this requirement. In the US the main problem is CONGRESS and the NIMBY effect. The solution is with the voters and the lead time to acquire leases in areas of high capacity potential, drilling to confirm, development drilling, and pipeline and tanker transport to bring it to refineries that must be built. This could be a 10 to 15 year lag from now to incresed US supplies. The lack of an energy program for the last 30 years that anticipated projections of oil production peaking,  emergent countries competing for supplies is the real problem. May 31, 12:47 pm | [comment link]

3. Brian of Maryland wrote: Baruch pretty much nails it. Brian May 31, 1:37 pm | [comment link]

4. art+ wrote: The USGS has estimated this month that the bakken formation in the Dakotas and Montana hold about 3.7 B barrels of recoverable oil with todays technology with another 1.3 B in canada. Continetal resources reported last week that a new well was producing 693 barrels a day and saw their stock jump from 40 to $63 a share. This field is larger than what is available in Alaska and is some of the lightest crude in the world. N. Dakota has reported that drill rigs working are double what drilled last year and companies are bringing new rigs in every day. Also the new well of continental was drilled below the bakken formation and it is possible that this could increase the amount of recoverable oil in the area. May 31, 10:05 pm | [comment link]

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