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September 25, 2008

Comments

J Hsu

The word on the street is that high oil prices will push the need for renewable resources -- but at the same time, it makes the development of unconventional resources viable. What strategy will win out?

Paul Roberts

J--
Excellent question. Higher prices will indeed encourage both more alternatives, but also more oil--thus raising the possibility of a kind of paralyzing equilibrium that simply maintains the status quo. But in fact, a high-price environment could give alternatives several small but crucial advantages over oil, unconventional or otherwise. First, whatever surge of new oil is brought to the market as a result of these higher prices will be temporary; sooner or later, demand for oil will once again move ahead of supply and prices will rise, making oil unattractive again. Second, and more fundamentally, "unconventional" oil is still plagued by lots of external costs, such as CO2/climate, and, in some cases (such as 'heavy' oil in Venezuela) political instability. To the extent that today's high oil prices encourage alternatives that have fewer environmental and political costs, alternatives will gradually pull ahead.

Trip Wingate

Do you feel that the +$100 oil price shock of March-October 2008 contributed directly to the financial market crash in any substantial way? In The End of Oil you stated that "six of the last seven recessions" were preceded by oil price spikes within the previous six months. Did stretched consumers all start defaulting on their mortgages in part because they were feeding their gas tanks? And with OPEC "defending" a +$70 price at this time, is that sufficiently high to maintain consumer/political pressure in the emerging alternative energy process?

Paul Roberts

Good questions. I think it’s clear that costlier oil helped “grease” the skids of the financial crash. It certainly hurt consumer spending (if we’re paying more for gasoline, we’re buying less at Wal-Mart or Burger King) which then feeds into the foreclosure cycle. And it’s also pumped up our trade deficit and forced us to borrow more heavily from foreigners. (Conversely, falling oil prices are one reason some economists feel we’re at the bottom of the current crisis.) As to whether oil will remain expensive enough to keep encouraging alternatives—probably. At $75 per barrel, according to various experts, many alternatives are still viable. (See the piece on oil prices by Roger Lowenstein in the Times Sunday Magazine (http://www.nytimes.com/2008/10/19/magazine/19oil-t.html?pagewanted=print) And personally, I don’t expect oil prices to fall too much lower than that, or not for very long. Yes, OPEC will struggle to “defend” an oil price of $80 (which is the level I’ve seen in news accounts), largely because the cartel’s price-fixing unity is likely to fracture as prices fall. (The reason: some members, like Venezuela, will over-pump in order to maintain their revenues, thereby adding to oversupply.) But the long-term global enery picture hasn’t really changed. We still need lots of oil and it’s still getting harder to find it, or at least, cheaply. Barring an outright Depression, oil demand isn’t likely to fall too far, or stay down too much longer: China, after all, has no plans to stop growing into an industrial power. Most likely, oil prices (and our interest in alternatives) will come roaring back just about the time the economy recovers.

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