Thursday, April 28, 2005

America's oil supply

The Bush and Cheney show have gone into damage contol mode trying to bring down the price of oil in the past week. Bush had a high profile meeting with Saudi Crown Prince Abdullah.

Abdulla pledged to produce enough oil to keep the US gas guzzlers filled to the brim at all times. He did not make any promises about the price. The Saudis now sell some of thier highest quality oil (light sweet crude) to China. This is the oil that is easiest to refine, and produces the most gasoline and jet fuel, and yields the highest profit. Few countries are priviliged to receive these shipments, so this is an indication of how highly the Saudis value the Chinese market. The Saudis now have two major markets for their oil, the US and China, and they are happy to see who is willing to pay more on any given day. It is called a seller's market.

With drilling in the Arctic, making deals and threats around the globe, and new "unconventional oil" technology, America may be able to keep the supply coming in for a few more years, maybe a decade. The question is: at what price? Wars to protect oil supplies are incredibly expensive (and immoral). Deepwater drilling, and unconventional oil is available but it too is very expensive, and yields a much smaller "energy profit". For example, it takes about 3 barrels of oil equivalent to produce 4 from the tar sands of Alberta. This is a far cry from the days when oil gushed out of the Texas earth at high pressure. The mammoth oil gushers of the past may have been history's greatest ever energy profit. Those days are now gone and they are not coming back.

America is a already far over-extended financially, and if we keep paying ever increasing costs per barrel for increasing numbers of barrels, this will drive our currency further down. This is because most of these barrels of oil are imported. And even domestic oil is costing us more to produce, now. We can drill for our own oil and gas in the arctic, bring the gas down in a huge pipeline through Canada, and yes, we will have achieved a little bit of energy independence. But this will still be expensive fuel for a deeply indebted nation. If we use it wastefully it won't do us any good at all.

Note also that there is positive feedback in this process: since oil is priced internationally in US dollars, as the dollar weakens due to our poor balance of trade, this also will increase the price of oil, independant of any supply and demand issue. Even our out-of-balance trade with China, which has been weakening the US dollar, is, in effect, driving up the price of oil. The US clearly has a choice here: it can turn to conservation to ease its mounting energy crisis, or it can go broke trying to maintain its supply-only energy policy.

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