What comes after the oil?

Martin Hutchinson: The Bear's Lair: What comes after oil?

In June's "The effects of $80 oil" I discussed the effects on the U.S. and world economy of a large and sustained rise in the oil price. My extreme scenario of that time has become less extreme, with $42 oil becoming $53 oil in the intervening period. I thought it worth revisiting this now less unlikely scenario, to look at what such a development might do for our sources of energy.

The almost universal opinion currently, expressed for example by Economy.com on a number of occasions this week, is that the current run-up in oil prices is a short term "bubble," and that we are shortly to see its bursting, followed by a reversion in the oil price to its historically "normal" level of $20-25. I am coming increasingly to disagree.



In reality, oil prices are not particularly high. They are still in real terms well below their peak level of 1981, which equates to around $80 per barrel in today's money. While that was a "spike," people forget that oil prices remained high throughout the first half of the 1980s, until a sudden collapse in the fall of 1985, which took them down from about $28 per barrel (say, $48 today) to the low teens -- the equivalent of the $20-25 per barrel still regarded as "normal" by most commentators. Thus oil prices remained above $40 per barrel in today's money, fluctuating as high as $80 and with sustained plateaus above $60, for a full 12 years, from 1973 to 1985. In principle, therefore, the "normal" price of oil may indeed be in the $50-60 per barrel range, or even somewhat higher, far above what we have been used to in the last two decades.

In battery powered automobiles, after many years of slow progress, we have a genuine step forward with the introduction of the Toyota Prius hybrid electric/gasoline automobile, in which the battery powers the automobile at low speeds, the gasoline engine at high speeds, and the kinetic energy from braking is absorbed into recharging the battery. This remarkably clever design, whose gasoline consumption is rated at 55 miles per gallon, at a recommended sale price in the United States of $21,415 costs about $4,000 more to the consumer than a regular automobile of the same class; unsurprisingly, given the rise in oil prices, there is now a waiting list for it. Usefully, the battery doesn't require overnight recharging, unlike previous electric automobiles. For wealthier consumers, the Prius and its future competitors represent a major step forward, which will usefully limit oil consumption in the future. Switching affluent Americans to the Prius, and no doubt to its sports utility vehicle analogs, will not however be enough to solve the world's energy problem.

Read the entire article from Petroleum World by clicking this link.