The Greening of the Planet

Cheap Oil, Good Times

Everyone has been agog over the rapid fall in oil prices.  No-one is quite sure when the bottom of the price barrel will be scraped.  Despite the Greenists dire predictions of  looming "peak oil" to hit in 2010, 11, 12, 13, 14 . . . and counting . . . which would have allegedly spelled the end of plentiful oil supplies, leading to rapidly ratcheting oil prices and economic doom, the opposite has happened.  (The Greenists, of course, trumpeted peak oil as an ideological rallying cry to force governments into investing other people's money in "alternative energy".  They were never interested in telling the truth about oil supplies.)

Now the world is awash with cheap oil.  You can draw a bath of the stuff, if you wish, and it will only set you back a nickel.  What is going on?


Firstly, there has never been a shortage of oil reserves.  Since new technologies have been developed to extract oil, such as fracking,  the world's oil reserves have increased significantly.  Moreover, the United States has been sitting on oil reserves greater than those in Saudi Arabia which, for reasons known only to itself, it decided decades ago to "lock up".  Which leads to the real reason oil prices stayed high for so long: the supply of oil was artificially constrained by states and government which thought themselves smarter than the average bear and which, being made up of our betters, decided that oil supplies should be constrained for our own good, mind.  Thank you, thank you, dear Papa Doc.

The oil cartel, OPEC was one such "beast".  By deliberately constraining supply, world oil prices were ratcheted up, leading to massive wealth transfers from the rest of the world to OPEC members.  It was price fixing of the most crude sort.  The refusal by President Obama to build the Keystone Pipeline from Canada was another.  It has been an ineffectual, idiotic attempt to craft the world into the vision of our "betters" in an attempt artificially to engineer alternative energy sources.

But free markets always have a way of getting around artificial, hubristic, human imposed constraints.  As the price of oil rose, it justified investing in new technologies to extract oil in hitherto inaccessible places, such as shale.  What happened was that instead of a few more million barrels of oil at the margins being discovered, a vast ocean of oil suddenly became available for extraction.  But, worse still for the market cartels, the exploration had only just begun.  Who knows how much oil there is on the surface of the earth, awaiting extraction?  We don't know.  But count on it being heaps.

Within a few short years, oil reserves pushed out to cover hundreds of years of consumption at present levels.  So much for peak oil.  So much for government planners and professional alarmists.  Their doomsday has not materialised.  We have been labouring under their rod through their artificial constraints of supply--all of us--but it was a vanity, a falsehood, a con.  The free market has broken the cartels down and shredded  the market controls of interfering, intrusive, regulative governments.

Where will the price of oil eventually settle?  We don't know.  But it will settle, somewhere, when supply and demand come back into price equilibrium.  Already, supply is constricting at the margins now that the price of oil has fallen.  Oil which was economical to prospect and exploit when it was selling for US$100 a barrel is now uneconomic at US$50 a barrel.  Exploration plans and extraction plans are being scaled back, folded up, and put in the drawer until a time when prices rise again. 

Even in New Zealand--which has been a marginal producer, yet with unexplored, unexploited potential we are experiencing this reality:

Plunging oil prices have forced explorers to scale back plans in New Zealand, some have had to restructure and there could be a sharp decline in capital spending in a sector the Government has backed heavily. Around the world, explorers are pulling back on drilling programmes, rigs are idle and some companies are eyeing hiring supertankers to stockpile oil while prices are at six-year lows.

Oil prices dipped yesterday with Brent crude closing at US$47.57 and West Texas Intermediate hitting a similar trough at US$45.90 a barrel.  The drop came as Goldman Sachs sharply cut its forecast for 2015 oil prices, projecting the US commodity would hit US$41 a barrel in three months and US$39 a barrel in six months, down from US$70 and US$75 previously.  Listed New Zealand Oil & Gas says it is cutting back its exploration and the price plunge had the industry reassessing work programmes. [NZ Herald]

Meanwhile, falling oil prices will mean economic activity will eventually pick up again.  The wealth transfer from oil consuming countries to oil producing countries will ebb, leaving more resources and wealth for investment and expenditures at home.  Sure there will be a few casualties (Russia, OPEC countries, Nigeria, Scotland) whose economies have been built upon artificially high cartel-dictated prices for oil.  But there will be windfalls for oil importing countries such as China and Japan. 

As Sheik Yamani once astutely observed: "the age of oil will come to an end, but not for any lack of oil".  Eventually, hundreds of years from now, oil-based economies will be replaced by alternative (cheaper) energy sources, leaving more expensive-to-extract oil in the ground.  It will happen naturally--and in an orderly fashion--without the need for a government planner in sight.  That's the glory of the free market, which is really the glory of free men obeying God by going forth to subdue the earth and make it bud and bear fruit.

Finally, we must acknowledge the shrieks of horror emanating from the Greenists at the prospect of all those millions of tonnes of CO₂ being released into the atmosphere as a result of burning all those megatonnes of oil.  Right on.  The sooner, the better, we say.  All that CO₂ released into the atmosphere will help turn the globe into the greenest it has been.  Plant life will flourish as it never has before--and along with it, all the abundance of animal and bird life that depends upon green grasses, trees, and shrubs.