Re: Matthew Simmons on Oil

From: Rich Blinne <rich.blinne@gmail.com>
Date: Wed Aug 24 2005 - 13:32:29 EDT

On 8/24/05, Al Koop <koopa@gvsu.edu> wrote:
>
> But I don't understand what the incentive is for Russia or Saudi Arabia to
> raise output to bring the price down. If the oil people are even close to
> right, including Chevron and Exxon, there is not much excess supply to be
> had by anyone else. You don't even need a high school econ course to realize
> that selling 8 billion barrels a year at $60 per barrel beats selling 10
> billion barrels a year at $40 per barrel. I doubt if there is any way the
> world could trim its use by 12 percent a year and make up for depletion as
> well so this cutting back should work. Russia and Saudi Arabia would be
> doing themselves a favor by resting their fields and having mor oil for the
> future plus they would force the world to start preparations for a future
> with less oil--a very good thing that might stave off some military
> solutions if the decline happens too quickly. It seems the Putin
> administration and Abdullah should see this and make sure the price does not
> fall below $60 per barrel.
>

There are two reasons why the Saudis do not want the price too high. First,
a global recession would crash the price. Second, it makes expensive
alternatives more attractive. The question is not what the Saudis desire.
Rather, the question is what the Saudis can actually accomplish. Again from
the NYT Magazine:

The onset of triple-digit prices might seem a blessing for the Saudis --
> they would receive greater amounts of money for their increasingly scarce
> oil. But one popular misunderstanding about the Saudis -- and about OPEC in
> general -- is that high prices, no matter how high, are to their benefit.
>
> Although oil costing more than $60 a barrel hasn't caused a global
> recession, that could still happen: it can take a while for high prices to
> have their ruinous impact. And the higher above $60 that prices rise, the
> more likely a recession will become. High oil prices are inflationary; they
> raise the cost of virtually everything -- from gasoline to jet fuel to
> plastics and fertilizers -- and that means people buy less and travel less,
> which means a drop-off in economic activity. So after a brief windfall for
> producers, oil prices would slide as recession sets in and once-voracious
> economies slow down, using less oil. Prices have collapsed before, and not
> so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in
> OPEC production and a reduction in demand from Asia, which was suffering
> through a financial crash. Saudi Arabia and the other members of OPEC
> entered crisis mode back then; adjusted for inflation, oil was at its lowest
> price since the cartel's creation, threatening to feed unrest among the
> ranks of jobless citizens in OPEC states.
>
> ''The Saudis are very happy with oil at $55 per barrel, but they're also
> nervous,'' a Western diplomat in Riyadh told me in May, referring to the
> price that prevailed then. (Like all the diplomats I spoke to, he insisted
> on speaking anonymously because of the sensitivities of relations with Saudi
> Arabia.) ''They don't know where this magic line has moved to. Is it now
> $65? Is it $75? Is it $80? They don't want to find out, because if you did
> have oil move that far north . . . the chain reaction can come back to a
> price collapse again.''
>
> High prices can have another unfortunate effect for producers. When crude
> costs $10 a barrel or even $30 a barrel, alternative fuels are prohibitively
> expensive. For example, Canada has vast amounts of tar sands that can be
> rendered into heavy oil, but the cost of doing so is quite high. Yet those
> tar sands and other alternatives, like bioethanol, hydrogen fuel cells and
> liquid fuel from natural gas or coal, become economically viable as the
> going rate for a barrel rises past, say, $40 or more, especially if
> consuming governments choose to offer their own incentives or subsidies. So
> even if high prices don't cause a recession, the Saudis risk losing market
> share to rivals into whose nonfundamentalist hands Americans would much
> prefer to channel their energy dollars. A concerted push for greater energy
> conservation in the United States, which consumes one-quarter of the world's
> oil (mostly to fuel our cars, as gasoline), would hurt producing nations,
> too. Basically, any significant reduction in the demand for oil would be
> ruinous for OPEC members, who have little to offer the world but oil; if a
> substitute can be found, their future is bleak. Another Western diplomat
> explained the problem facing the Saudis: ''You want to have the price as
> high as possible without sending the consuming nations into a recession and
> at the same time not have the price so high that it encourages alternative
> technologies.''
>
Received on Wed Aug 24 13:34:42 2005

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