No Matter How Much There Is, It Ain't Ever Gonna Be Cheap

Kurt Cobb as usual gets right to the practical heart of the matter in his latest column about why expanding claims about reserves, EVEN IF TRUE don't translate to cheap oil and gas:

Here's the short version of why forecasts of low long-term oil and natural gas prices are almost certainly wrong: It costs more than that to get the stuff out of the ground. Only two things could actually lead to low long-term prices: 1) Somebody could invent and deploy some genuinely brand new technology that makes it really cheap once again to get oil and gas out of the ground or 2) we could have a deep and grinding deflationary depression that brings demand for oil and natural gas down so much that prices collapse.

The people who are predicting $50, now $45 oil, and $3, now $2 natural gas (in the United States) for as far as the eye can see believe that such prices will result from the already widespread application of current technology. And yet, the very companies that use that technology to extract these hydrocarbons say that there's no way they can produce them profitably at those prices.ExxonMobil's CEO said last year, "We are losing our shirts" selling natural gas at such low prices. Forecasts for much lower oil prices would also represent losses on new wells for most oil producers.

The reality is that EVEN IF questionable reserve numbers are uninflated, prices from our hard-to-extract oil and gas simply can't fall that much.  Sure, we can have short-term volatility, as we saw in the oil markets from 2007-2009 - but the days of cheap gas and natural gas are over.  As I've written before, short term price volatility in energy and food markets (which are tightly tied together by a number factors, including biofuel production) mean that for ordinary families it is incredibly hard to know how much of their budget to allocate to those resources, but the general trend is more and more of what we have is being eaten up by fuel costs.  Fundamentally we have just enough volatility for policy-makers to justify being in denial about the overall trend - and thus, to impoverish ordinary people.  But the truth is that the cheap oil and gas is gone, and its days are fundamentally over.


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The availability of extractive resources depends on the price of extracting them and getting them to the market. It strikes me as a variation of the usual supply and demand argument, where demand drives supply, rather than the reverse. I have read that it costs $5 a barrel to get oil out of the ground in Bahrain.

By Jim Thomerson (not verified) on 20 Jan 2013 #permalink