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Oil - some crystal ball gazing

By John August - posted Monday, 28 November 2005


CO2 production bears on the greenhouse effect, but it's separate to the market. We can worry about whether the price has increased as the result of "supply" (diminishing oil reserves) or "demand" (increasing world demand driving the price up). Regardless, it will have the same economic impact. But demand side increases do not reduce the total world oil consumption - we're just squabbling more vigorously over the same oil. Reduced supply would reduce global oil consumption.

If we use more nuclear power (either because we are forced to, or in pursuit of lower CO2 emissions), we could do this for about 100 years using current nuclear reactors, before fissionable uranium runs out. Fast breeder reactors would give us about 30,000 years. But breeder reactors produce nuclear weapon material. We'd probably have to change our global institutions dramatically, so that there was an international body contracted to individual nations to provide power. That's a dramatic change - but in a few decades our ideas could change significantly.

We'll continue to burn coal for a while. CO2 sequestration has been suggested to ameliorate the greenhouse effects. Sure, it will mean less energy for the same amount of coal burnt, with an associated economic impact. But, as long as it is a net positive in terms of energy extracted, it will be worthwhile.

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It's meaningless to say that "demand exceeds supply". Demand always matches supply. The demand and supply curves can shift, but it makes no sense to say one exceeds the other.

But "price shocks" are still possible. In addition to fuel itself being more expensive, goods become more expensive, and people spend less on general consumer goods and accommodation as fuel absorbs more of their household budget.

So far, in Australia it seems that increasing oil prices have not caused other increases. But it may still happen, and if prices continue to rise, it must. As our oil reserves diminish relative to world oil reserves it will be a pressure on our balance of payments. Still, it is important to remember that some viable world economies have no native oil reserves - and the value of our coal exports might increase.

It's going to be painful. Still, the market will "respond" to the change. But, should we leave it to the market or intervene?

It's a long running conflict, which I can't settle decisively. Is there some pain which is irreducible, regardless of whether the market or something else sorts it out? Can we reduce the pain through intervention? The question is whether the market will be able to "read the future" and direct resources appropriately as the storm approaches - or whether reflection outside of the market is needed.

Environmentalists have encouraged us to use less oil and energy - because of the impacts of consumption. However, a side effect is becoming used to getting by on less oil on our own terms rather than being forced. But, are we tightening our belt before we need to? Or does some tightening the belt in advance mean less later on? The idea of changing our cities before the crunch - making them focused on public transport and bicycles like some European cites - may make sense.

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What else might the future hold? Time for a little crystal-ball gazing ...

Oil companies see an "oil crisis" differently. They only need provide oil profitably. It's only a problem if:

  1. alternatives mean the demand for oil drops to below their distribution capacity (even then, a “crisis” only takes place when it drops below the point of profitability); or
  2. their supply of oil drops to below the point they can cover their fixed costs at market prices.
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Thanks to other members of the Shove, a Sydney based economics and politics discussion group, for help in developing the ideas in this article - in particular David Bofinger, Aaron Cleavin and James Murray. Any problems with this article are necessarily my own.



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About the Author

John August is the convenor of Abolish the States Collective, and of the group Sydney Shove.

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