Tuesday, March 25, 2008

The Price of Oil

I recently read a great interview with John Hess, the CEO of global oil company Hess Corp that was very enlightening with regard to the ever-increasing oil prices here in the States. I’m not one to complain about it—I know other countries pay a lot more—and I’m not one to drive around town for the cheapest price, saving mere pennies. I admit, though, it does appear to be getting to a point where summer road trips or even quick trips across the state to see the in-laws seem a bit profligate.

In the interview, Hess was asked why oil has moved up to over $100 per barrel. He responded, “We've moved from a supply-led market to a demand-led one. In the past, the world has relied on OPEC's spare capacity, which in 1985 was 10 million barrels per day. Today that number is about 2.5 million barrels a day. We no longer have a safety margin to ensure price stability in the face of supply interruptions and demand spikes. Right now it's hard to see any relief in sight. Then there's demand. About 50 percent of oil demand is for transportation, and auto ownership in the developing countries is growing swiftly, especially in India and China.” Experts have been saying for years that rising oil prices would eventually cause a swift downturn in consumption; as soon as gas prices became too high, consumers would start to cut back on driving and start carpooling or taking the bus. But that hasn’t happened, and Hess explains why: “The reason we've withstood the increase is that consumer income has grown faster than energy expenditures have. We spend about 6 percent of our income on energy, down from 8 percent 20 years ago. Energy just isn't the largest or most important item in our personal spending. Even after the recent price increases, gasoline is still two times less than the cost of Evian water, and 10 times less than a Starbucks latte.”

Hess is optimistic about opening up new oil reserves around the world—the high price of oil has now made it possible to consider drilling in places where 20 years ago no one would have thought to try, such as in deep ocean water. But even that won’t solve the current supply problem completely. Something must be done on the demand side as well. Hess says, “We can't blame this problem on OPEC, because we have so much wasteful and inefficient consumption. The automobiles we have on the road today are quite inefficient—less than 20 percent of the fuel energy is actually converted to useful energy. We should certainly increase hybrid ownership, but I believe that hydrogen fuel cells are the breakthrough technology we need.”

According to Hess, we’ve taken about one trillion barrels of oil from the ground so far and it’s generally understood that there are about two trillion barrels left down there, but what’s left is the stuff that’s difficult to get to or requires extra processing. For sustainable economic development, we simply must find more efficient energy sources. In the meantime, don’t expect oil prices to significantly lessen….ever.

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