Bush asked the Saudi prince today to increase oil production.
Forgive me if I am overlooking something obvious, but what incentive do the Saudi Arabians have for pumping more oil to keep the prices down? Why do high prices “damage oil markets” (in the words of the prince)? If they sell less of their oil at a higher price, doesn’t that benefit them?
Higher oil prices = more inflation = bad for business for anyone who is wealthy.
In the short term high oil prices benefit the producers. But economics being what it is, inescapable, high prices produce more supply and eventually lead to sharply lower prices. Whether the short-term prices justify the long-term crash is called strategic thinking :).
I am told that once oil prices reach $70/barrel, the Canadian tar sands become economical. (I am also told that it costs around $24/barrel to produce that oil. The difference is the add-on costs such as restoring the landscape, taxes, capital costs etc) Once that happens, piddily little S. Arabia becomes a bit player in the oil biz. Of course oil prices have to stay at $70/barrel for that to happen-unlikely.
In the longer term high oil prices could render the use of oil obsolete.
The higher prices go the more incentive their is for governments and industry to find a cheaper alternative to oil. So by keeping prices high, the oil producers could put themselves out of business.
And the rest of us would be much better off because we would not be dependant on oil supplied by people who are hostile to us, and also because the alternative power source we eventually find would very likely be much easier on our environment. So in a way high oil prices are a good thing.
There is also the danger of over-production.
Source: http://english.aljazeera.net/NR/exeres/80C89E7E-1DE9-42BC-920B-91E5850FB067.htm
The actual source for the above information is Energy investment banker Matthew Simmons, of Simmons & Co International
The tar sands are already economical. Ft MacMurray has been booming for several years now. Billions and billions of dollars are being spent on infrastructure. But that won’t make the Saudis bit players for a long long time. Their oil is still massively cheaper and easier to produce than ours, and will remain that way for quite a while yet.
Other fuel sources become more attractive when oil becomes too expensive as well. Before the 70s embargo the US got alot of its oil from the middle east, now we get most of ours domestically or from Mexico, Canada, domestically, venezuela, the UK, russia, etc. There is also a risk that some country will sell oil below market value, cutting into the profits of the higher charging country.
What other sources of cheap fuel are there, really? Can these “other sources” come online quickly enough to stave off higher fuel prices?
For rolling a vehicle unattached to something like rail infrastructure? Right now, not much. The concern an oil-rich, otherwise-poor country like Saudi Arabia might have is that continued high oil prices will create the economic incentives to make some of the currently expensive alternatives cheaper. Even at the lower gas prices of a couple years ago automakers started rolling out cars with hybrid engines which use gasoline not only to power the car but also to charge batteries which can power the car under different circumstances. Right now consumers pay for that difference – the payback period for a moderate-distance driver is pretty long. But next year’s hybrids will be better. And the year after that better still. Hydrogen fuel cells are still several years off. If oil sells for, say, $100/bbl, “several” will be a shorter time than if oil is at $50 or $30. For fleets with small travel areas (say, traffic enforcement scooters or even FedEx vans in a dense city), electricity right off the public grid becomes an option at some point.
There’s also the risk of habit substitution. Someone somewhere decided on a lark to take the train into work today for the first time. Maybe they’ll like it. Maybe the schedule limitations of public transportation will be less annoying than $2.75 gas. Someone else will make the same choice not at $2.75 but at $3.00. Likewise, someone somewhere is ruing the day he got talked up to the Excursion from the Explorer he had his eye on. Sure, Ford made his car payments the same for the two vehicles, but that extra $10 or $20 week on gas is eating into his lifestyle. If gas is still expensive when he goes for his next car, that hybrid minivan from the first paragraph is going to look pretty attractive.
Ethanol is a quick fuel, as is canadian tar if prices get too high. There is also alot of fuel in russia that is too expensive to process and retrieve under todays market but if gas prices get too high it would be cost feasable. I think ethanol is the only fuel we could mass produce in a hurry though and we can only make 10% of gasoline out of ethanol. There may be others
Plus gas shortages may make countries consider energy independence, which won’t give immediate benefits but over the long run could make a dent in oil consumption.
High petrol prices may be the only thing that will ever get the No. American male out of giant, inefficient vehicles operated at too high a speed. Having said that, my own business is suffering from whopping and constant transport costs and that will affect everything in our economy. Finally, I do not think the u.s. has refinery capacity to do more right now and sufficient ships to haul more and all this blah, blah, blah is just Bush believing the electorate is stupid - well, it worked for two elections, so …
First and foremost I must say I am not in the oil business nor Canadian and everything I “know” about this subject comes from popular press readings.
That said-if oil prices stay in the $50-70 range then a) Saudi Arabia will make lots and lots of money selling their $0.50/barrel to produce oil anb b) alternative sources such as the tar sands will become even more economical. It won’t matter to Canada that S. Arabia makes much more per barrel, only that Canada makes something/barrel.
And while the limiting factor is the massive infrastructure necessary to produce the oil, from what I have read, there is a LOT of tar in them sands. I read that there are estimates that there is more recoverable (at some price) oil in the tar sands than oil in Saudi Arabia.
Why do we assume the current high price of oil at the wellhead is caused by the oil producers just raising the price?
Does the devaluation of the dollar against other currencies have a play in this? (Follow up question - Are the US budget deficits exascerbating the devaluation of the dollar?) Are the oil companies passing along the price “increases” without upping their own profit margins at the same time?