Friday, September 08, 2006

Possible new oil source and today's prices

Possible new oil source and today's prices

So I saw an article regarding the recent discovery of the oil field in the Gulf of Mexico. (Sure you all heard about that). I have a couple of concerns regarding the authors’ analysis of this discovery.

We don’t know really know how much oil is in existing oil fields – true. We don’t know how much oil is in this new field – also true. So now we have an uncertain amount of crude oil (possibly useable this decade) to add to our already uncertain amount of reserves, the short run effect will be – according to the author - “lower prices for oil”. Isn’t the price of oil determined by the market? The cost of a barrel of oil decreases when more oil is put into circulation (and increases when supply decreases) and not simply because it has found some more oil. If the oil in that reserve was useable NOW I could see how the price would fall, but it is still many miles underground.

Adding to the supply constraint is our refining capacity. Simply getting more crude oil does not help lower gas prices, it has to be refined. Perhaps this is where government could/should step in, or rather step back, and ease the provisions for constructing new refineries and allow the market to determine our refining capacity.

It was said that that oil could, in the future, be added to our domestic reserves which will lower prices as our future supply will be more stable (we still have some if OPEC cuts us off) and can be used when needed (such as another Katrina) but that would only serve to stabilize prices in the event of a supply shock, and not to lower prices now.

“Knowing that we have a reserve that will be ready for use 10 years from now means we can use the current reserves faster--today.”

What! First. It was made clear that we don’t know how much oil is down there, so would we really burn all our oil now in the hopes that in ten years our reserves will be replenished? Or does the author mean that since the quantity supplied has increased, prices will fall and the demand will increase - which is being defined as using our reserves faster.

Second. Would the government really put its reserves out to pasture just because more is coming in a decade? What if we have to fight another war in the next decade (unlikely I know :))? Do we not remember how long it took to tap into our reserves last year following Katrina to alleviate the high gas prices.

“Without the new reserve, scarcity of oil would put upward pressure on the price, encouraging conservation and slower withdrawal.”

And I thought that our conservation was due to the high prices (again a supply issue) and possibly the negative externalities our increased desires for consuming oil produced. And how would this [currently] unusable, unrefined oil be reducing our scarcity? If it is not able to be used now for something other than filling a rather large hole underground, what effect can it have on our existing scarce reserves that we can use? And even if the oil was useable now wouldn’t it still be the demand/supply of that scarce commodity that determines its price?

As a consumer do you demand more gas now because in ten years time the quantity supplied may increase?

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