NPR's Marketplace called me today for comments on this bizarre Financial Times article: "Opec to seek assurances on oil demand."
Apparently these absurdly rich countries -- with projected revenues of $658 billion this year -- who are selling their product at nearly $100 a barrel, are threatening not to invest in new production unless the consuming countries promise to maintain demand. Seriously! No, seriously:
Opec will this week seek assurances from some of the world's biggest oil consumers that they will maintain their demand as the members of the oil cartel come under intense pressure to boost investment in production capacity.
This is the dumbest thing I've ever heard, which is saying a lot considering who our president is. First off, who exactly can speak for the consuming nations and make a binding promise to keep up demand in the face of record-breaking prices? Nobody. This is capitalism. If high prices lead to fuel-switching, how could, say, President Bush, promise to stop it -- especially since he has already promised to encourage fuel switching?
Second, as I blogged recently, pretty much every producing country, except Saudi Arabia, is producing flat out. Yet demand keeps going up even at these prices. If OPEC is really worried about demand destruction, then they should want to invest in as much new production as quickly as possible. Indeed, the IEA predicted back in July that the world will see "increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012."
Third, IEA projects global oil demand will "expand by 1.9 million barrels a day, or 2.2% a year on average, reaching 95.8 million barrels a day by 2012, up from 86.13 million barrels a day this year." OPEC would be crazy not to invest in as much new supply as they could to meet this demand. Where is a better place for their money -- holding dollars?
So what is the real motive behind this bizarre threat? And how is the normally dependable Financial Times confused?
Let's start with the FT, which writes:
Consumer countries, in particular the US and in Europe, are investing in alternative sources of energy, such as biofuels and nuclear power, and energy-saving measures to reduce their dependency on crude oil and combat global warming.
Some Opec countries are worried such moves could jeopardise future demand just as they embark on expansion plans. "The declaration will be a statement on oil relations as seen by Opec," said one cartel source, referring to a draft of the statement.
Well, first off, nuclear power doesn't substitute for oil in most countries, certainly not the West, since we don't burn much oil to make electricity. Why? It's too damn expensive! [Note to the FT: Please stop including "nuclear power" among the "alternative sources of energy" -- it has been a leading source of energy for decades now.]
Second -- and it isn't clear just who is confused here, OPEC, or the FT, or both -- but alternatives and efficiency take a long, long time to kick in, assuming they are even adopted. Heck, even with nearly $100-a-barrel oil, the Congress may not deliver the president an energy bill with an increase in fuel economy standards -- and Bush may veto it anyway -- and that increase would be so wimpy that it at best it will slow our demand growth.
I'm a little surprised the FT bought OPEC's bizarre public explanation for its threat. A much more likely explanation for the threat is that OPEC is sending a warning to alternative fuel providers -- and those who finance them -- that they are prepared to increase production enough to crash prices and render the alt fuels uneconomical. Since I don't think OPEC has the ability to increase production that fast, I think it is a meaningless threat, but I suppose it could have some impact on those companies who don't read this blog or are otherwise poorly-informed.
I don't think $100 a barrel is enough to get our leaders off their butts and onto the serious task of getting us off of oil. Only a genuine recognition of the threat posed by global warming has any chance to do that.
This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.
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Comments View as Flat
undyau Posted 8:07 am
13 Nov 2007
Why not cut production ?
I've always thought that it made more economic sense for the countries in OPEC to reduce their output. That would force prices up and would extend the duration of their oil reserves and the wealth that flows from it. They should be able to take a slightly longer term perspective than the next quarter.
I guess that if they did take that approach then some rogue state may decide to go and bomb them back to the stone-age.
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Pangolin Posted 8:41 am
13 Nov 2007
How many solar panels.....
could OPEC buy with $658 billion? How many concentrating solar thermal power plants? How many wind turbines?
I'm just wondering because it occurrs to me in that in the not so distant future there could be a drastic shortage of oil to sell to the rest of us at the same time there is a drastic shortage of, say, grain to ship to the hungry masses of Saudi Arabia.
Or we could just come to our senses on the climate change frontier (unlikely) and decide to stop buying oil from them entirely. In that case OPEC would be relying on offshore investments to bring home the bacon.
In either scenario OPEC nations had better get cracking on a means of feedig thier populace when the black river of cash runs dyr. I suspect the rest of us aren't going to be too happy with them about then.
Put the Carbon Back
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odograph Posted 9:01 am
13 Nov 2007
jatropha
The craziest thing I ever heard was that the Saudis were going to plant Jatropha: link
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solar greg Posted 9:30 am
13 Nov 2007
Not if they are smart
They know the black stuff won't last for ever. If they were smarter they would invest in solar, maybe quietly so as not to encourage everybody else do it too.
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WWAGD?! Posted 11:40 am
13 Nov 2007
Exchanges, Not OPEC rule the market
OPEC is a fair player. It is openly sharing information...in fact recent statements about the high price of oil, don't make them look as much like the Marquis de Sade that they are portrayed as.
The villians? The energy exchanges. They buy up from OPEC and then set prices based on Fear, Uncertainty and Doubt (FUD).
There is no real competition, they are the new 21st century cartels. Every little tropical storm sends prices hurling.
We need more competition in the financing and exchange of oil and energy.
Don't get me wrong -- forcing us to new energy sources is a good thing...but these exchanges might eat up hydrogen and solar technology next!
Let's make sure that prices are set by rationality, and there is competition in financing and allocation of energy.
My Log
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trock Posted 2:34 pm
13 Nov 2007
da ja voo all over again
Somebody at OPEC remembers when oil was 34 dollars a barrel in 1980 and how it was 12 dollars a barrel in 1986. The member nations of OPEC sure did go thru some rough economic times, relatively, for them. They don't want to repeat that which is understandable. They probably have less to worry about this time, as the article said, there is less excess capacity.
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GreyFlcn Posted 5:41 pm
13 Nov 2007
Depends
That depends what scale you use.
http://greyfalcon.net/nuke.png
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stevenearlsalmony Posted 11:47 pm
13 Nov 2007
Children, teach your elders well.......
Thanks to the teachings of science, our children regularly report to us that Earth is round and finite in space-time. Easy enough.
Then, why is it that grown-ups with the very best education and responsibilities for ensuring a good future for the young deny one of these basic, irrefutable scientific facts?
While there is a clear consensus among young and old alike that the planet we inhabit is round, Thomas Friedman notwithstanding:),many political leaders and powerbrokers in the global economy act as if Earth is somehow infinite, not limited in its capacity to perpetually fulfill the needs and wishes of the human species. Their widely shared, consensually validated and specious thinking supports the idea that the Earth is a sort of cornucopia, a seemingly endless provider of whatsoever human beings desire. Our relatively small and frangible planet is treated by these erstwhile leaders like an ever expressive teat at which the human species continuously and eternally can suckle.
Take the example of the world's supply of oil. Children see that the oil supply must be limited because the Earth itself is bounded not boundless. In these times, the young ones recognize that older folks are rapidly building oil rigs everywhere on the surface of Earth, draining fields of their petroleum and then voraciously consuming it. Nonetheless, many people continue to consume the limited oil supply as if there must surely be no end to it. Given the requirements of practical reality, why are there not electric cars and trains taking us where we need to go? Where are meaningful economic incentives for limiting profligate oil consumption and promoting the development and use of alternative fuel sources? The policy-making and political decision-making processes of these leaders consciously ignores the current massive dissipation of the Earth's limited oil resources. Perhaps such behavior is both irrational and irresponsible.
It took millions of years for the oil reserves to form, thanks to God. And in the span of my lifetime it appears a few generations of voracious human beings, now numbering over 6.6 billion, are righteously "sucking up" the lion's share of the planet's petroleum capacity. If we old-timers simply keep doing what we are doing now to maximally expand oil production for immediate consumption, what resource base in petroleum will be left for our children and coming generations to this good Earth?
Steven Earl Salmony, Ph.D., M.P.A.
AWAREness Campaign on The Human Population
http://sustainabilitysoutheast.org/
http://journals.aol.com/sesalmony/HumanandEnvironmentalHe ...
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mnfox Posted 5:59 am
14 Nov 2007
We DO burn lots of oil for electricity
Mr. Romm, you say that "...since we don't burn much oil to make electricity," but this couldn't be farther from the truth. In fact, oil is used to generate more electricity than any other energy source, generating about 40% of our nation's energy. You can find this info at US DOE's website: http://www.energy.gov/energysources/oil.htm
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odograph Posted 6:08 am
14 Nov 2007
2% is not that big
electrical power generation by source
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mnfox Posted 6:14 am
14 Nov 2007
My bad
I read the stat incorrectly
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odograph Posted 6:54 am
14 Nov 2007
s'ok
It's the interesting difference between "40% of our energy" and "2% of our electricity."
It will be work to cut oil out of our energy diet, but less so in the electricity arena.
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sphinxie Posted 9:50 am
15 Nov 2007
phase 2
Sounds to me like they are getting ready to invest a LOT of money in future production, suggesting that they are approaching that point where they expect to run out of the easy-to-extract oil soon.
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