Oil is not so expensive, after all...
- From: mikesmith9999@xxxxxxxxxxx
- Date: 21 Aug 2005 16:58:29 -0700
>>From Wednesday's Globe And Mail (TORONTO)
OTTAWA -- Q: What is the price of crude oil?
A. Figure it out. It's two-thirds of its price in 1979-80 and
two-thirds of its price in 1864.
Q. What was the price of oil in 1979-80?
A. In 2005 dollars, $90 a barrel.
Q. You mean oil is cheaper today than it was 25 years ago?
A. Absolutely. And cheaper than it was 140 years ago, too. In 1864,
inflation-adjusted, it spiked precisely to $86.19. Three years earlier,
oil sold for $9 a barrel.
Q. So, with oil at $65 a barrel now, it's 20 per cent cheaper than it
was in 1979-80?
A. No, no. It's much cheaper than 20 per cent.
Q. How can that be?
A. Because, BTU for BTU, oil does twice as much work now as it did in
'79-'80. On average, cars got 15 miles a gallon back then. They get
28.5 now.
Q. Are you saying that, 25 years ago, people were essentially paying
$180 a barrel?
A. BTU for BTU, vis-à-vis 2005, absolutely.
Q. Why, then, is oil now so cheap?
A. Two reasons, really. First, people don't use oil for all the
purposes they used it for in the past. In the States, the proportion of
homes heated with oil has fallen by 50 per cent. In absolute terms,
even with the millions of houses built in the U.S. since the '70s, the
numbers of homes heated with oil fell by 25 per cent. And, of course,
people are using less energy in general. Second, oil prices are halfway
between peacetime and wartime. We have fear of a supply crisis. We
don't have a supply crisis.
Q. Yet the price keeps rising.
A. Many people are sure that there will be a supply crisis. Some of
them think it will be soon. Some think it will be some day.
Q. How can you tell who's right?
A. You'll know for sure when oil hits $180 a barrel.
Q. Fear is really expensive.
A. The Canadian Energy Research Institute figured a couple of months
ago that the oil itself is worth $30 a barrel. Everything above $30 is
fear.
Q. So, roughly, half of the price of oil is oil, half is fear?
A. Precisely. The increases now are 100-per-cent fear. It's a bit
different at the pump. In the gas tank, it's one-third oil, one-third
fear and one-third tax. On a global basis, the world economy is paying
$2.8-billion a day for fear. By the way, two years ago, fear sold for
only 40 cents a barrel.
Q. What are the chances that the fears are rational, that oil supplies
will run short?
A. The chances are very small. Oil inventories are 10 per cent higher
than a year ago. Higher prices are already working.
Q. So the higher prices are a good thing -- even without a shortage?
A. They have a job to do, and they're doing it. And the higher the
eventual spike, the further the price will fall.
It's unfortunate that, until then, the punitive cost of fear falls
indifferently, on the just and the unjust alike. Like taxes.
Q. Well, let's say you're right. How far down could oil go?
A. You probably wouldn't be far wrong to say $20 a barrel.
Q. Why $20?
A. That's the average price of crude, adjusted for inflation, for more
than 100 years. Crude was $20 a barrel in 1899, when world consumption
hit 150 million barrels. It was $20 a barrel in 1999, when world
consumption hit 24 billion barrels.
Q. But you do remember the cars lined up at gas stations across the
U.S., don't you? The shortage must have been real.
A. All of the six or seven quote-unquote crises that we've had have
been political crises, not oil-shortage crises. Most often, it's war.
Richard Nixon caused the first oil crisis, though, when he imposed
price controls on U.S. retail oil prices in 1973. The price went up,
and kept going up, until it spiked in 1970-80. Ronald Reagan got rid of
price controls in 1981 and oil prices plunged.
Q. You mean that the crisis of '79-'80 wasn't really an oil crisis at
all?
A. It was a policy mistake. Richard Nixon and Jimmy Carter didn't
intend it. Neither of them understood the importance of honest prices.
Carter thought he was helping when he put a wood stove in the White
House.
Q. But everyone knows that we're now heading toward a real crisis. I
read warnings about it all the time.
A. You are right. The first warning came in 1915, exactly 90 years
ago, when the U.S. Bureau of Mines determined that crude oil would run
out in 1924.
Carter said that the world would run out of oil by the end of the
1980s. In Venezuela, Hugo Chavez now says that oil reserves are
running out. For Chavez, it's more a wish than a prediction. Some folk
want the end times of oil because they think that we're mostly bad
people who deserve economic calamity. It's an article of faith.
Q. An article of faith?
A. Exactly. For the doomsters, the people of the apocalypse. It's a
fashionable creed in certain circles. They are secular
fundamentalists. They believe you can only get to paradise on foot.
Q. And you?
A. Truth is found in honest prices. In premium-brand apple juice, for
example, which sells for the same money, per barrel, as crude. In
discount-brand body spray, which sells for $5,628 a barrel. In a
no-name shower gel, which sells for $3,805 a barrel. In perfumes and
scented water that sells for $8,000 a barrel, or more.
Q. But people don't use as much perfume as they do gasoline.
A. No? Sometimes, close up, it's hard to tell.
Neil Reynolds is an Ottawa writer whose columns on national economic
issues appear Wednesday and Friday. He is the former editor-in-chief of
The Vancouver Sun and the Ottawa Citizen.
.
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