Arnold Kling  

Oil Econ 101

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I once wrote an essay called Oil Econ 101, in which I argued that while we can lower our consumption of oil, that would not reduce our dependence on Saudi oil. Ram of suggested I might want to comment on this interview with Robert Baer, a former CIA analyst who is concerned about what he sees as the unsustainability of the Saudi regime.

I've talked to a lot of oil analysts and they've said, "You know, you cite the figure of $150 per barrel if the Saudis' contribution to the world oil supply were cut off, but there are no econometrics for this."

The important point is that for a large price shock to occur, Saudi oil production would have to be curtailed. It is not enough for the Saudis to stop shipping oil to the United States--in the world market, oil is oil. Regardless of where they ship their oil or where we buy our oil, it is overall supply and demand that determines the price.

For Discussion. If you believe that there is a probability of at least one percent that the world price of oil will be $150 in three or four years, what opportunities are there for private companies and for speculators?

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COMMENTS (3 to date)
Stephen Richards writes:

The Oil at $150/barrel interests me. I have been reading a lot about the peak oil production estimates, where the world production of cheap oil starts to decline (as it did in the US in 1970). The estimates range from 2015 to as soon as 2000 for the year when oil production will start a slow but persistant decrease. So I think that there is at least a 1% chance that could happen. But what would I invest in?

I am English, petrol there costs about $4.50 - $5.00/US Gallon right now (mid 2003). This has not stopped people driving - they have no choice, they drive anyway, and most people still have a 30 minute commute. People do not drive Hummers in the UK - perhaps that is a short. There are a lot of tiny engine cars (0.9L) getting 35+ mpg.

My other thought is that cheap easy to pump gas is the kind of gas that aircraft like - so I would short airlines if they are not actually bankrupt already - except that I am too scared to short - I like to think more positively than that.

I think the only obvious buy is the companies who make windmills for electricity as US natural gas is also looking to be in bad shape (even Alan Greenspan noticed) and that appears to be a somewhat regional market. Right now however they seem to be small players under everyones radar screens. Who knows what will happen to them if they were suddenly needed to increase windmill production 100 fold whlist suddenly in competition with say GE.


Mcwop writes:

Setting up a sandwich truck in the ANWAR would be a good opportunity. Someone will have to feed the oil workers there. $150 a barrel might change a lot of votes in congress.

David Thomson writes:

I simply do not believe this scenario is plausible. The odds are better that Shaq O’Neal will beg me for mercy on the basketball court. The oil price tag of $150 a barrel would mean that a horrendous disaster had occurred. No, it is far more likely that oil prices will drop considerably because of the recent Canadian finds and the new government being formed in Iraq. At this point (knock on wood), the future looks very bright.

Won't we eventually run out of oil? Heck, by that time we will switch to an alternative fuel source. I would never bet against the ingenuity of the human race.

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