The Right Price for Oil
21 October 2008I had lunch with a friend yesterday, who is now investing in drilling for oil in fields that were obsolete when oil was $14.35, but which today pay out nicely. I told him that I increasingly had the point of view of the book “The Prize,” i.e., that oil drove everything else in the world: war, peace, the cost of all goods, inflation, foreign policy, the price of gold, strength of the dollar, all politics.
He seemed to agree.
Now, keep in mind, I am not quite there yet. Just 80%.
Tonight there was an excellent two hour Frontline piece on U.S. and global energy issues. My friend Eric Pooley did a fine job providing the “reality line” woven in between all of the lobbyist BS interviewer Martin Smith elicited from his many subjects. Among them: John Dingell, the most hopeless politician in the energy discussion (yes, he’s from Michigan); the three U.S. car chiefs, the ever-embarrassing CEO of ExxonMobil (who refused to meet with top shareholders, period), the VP of flack at Exxon who just lied, lied, and lied about the company’s behavior, and so on.
The Japanese looked quite smart.
I was left with a few thoughts after all this, and the conversations we’ve had at Future in Review over the last few years:
1. Detroit is hopeless, and will block all progress.
2. Same for the Bush administration, which uses the EPA to avoid improving CAFE standards
3. Same for the EPA, despite their staff scientists’ continued efforts to bring science to decision-making (Steven Johnson will find a special place in Hades for his time in DC)
4. Same for ExxonMobil, for paying for Fake Science, Deniers of climate crisis, and basic obstructionism.
On the other hand, I had a chance to re-view a Charlie Rose interview with my friend Amory Lovins, head of the Rocky Mountain Institute, on the issue of energy independence just a few nights ago, and he continues to believe that this is achieveable, given the will.
Ah, the will.
In a word, that’s the problem. The Frontline program had a fine woman researcher from Rice University on, who nailed it at the end: all of the players have been acting as if their own town or company were all that mattered, rather than the country or the planet.
Finally, returning to that lunch conversation, I suggested to my friend that the ultimate good price for oil would be consistently high, to encourage real long-term investment in alternatives. I told him that the real price today seemed to be around $80, based on supply and demand (and not on options traders). And, while this may be true at current levels of economic growth and operations, it is not hard to imagine that the economic slowdowns essentially caused by greedy oil pricing (the subject of a future blog) could lead to lower pricing.
Finally, I suggested that pricing at around $45 per bbl might be just perfect: enough to provide profits for everyone in the business, including alternative energy businesses, while quickly eliminating the current political regimes in power in Russia, Iran and Venezuela. Now that would be the right price for oil.
One Response to “The Right Price for Oil”
October 22nd, 2008 at 4:52 am
Some general support here for your theory.
Neomercantilism and Sloppy Central Bankers
by David Merkel
When I wrote for RealMoney, one of my continuing themes was that the Federal Reserve was less relevant because neomercantilistic nations like China (and perhaps OPEC nations) had reasons for promoting exports to the US that were less than economic. As such they would buy US fixed income in order to facilitate their exports. What could be sweeter? You send goods; we send promises, denominated in our own currency.
With that, I want to point to a short post from Marginal Revolution. Like me, he takes the “modified Austrian” view that the bubble was caused not only by the Fed, but also by the neomercantilists, both of which I fingered in my “Blame Game” series. Buying longer dollar-denominated debt stimulated mortgage rates more than the Fed could, because under normal conditions the Fed can only affect the short end of the yield curve.
http://alephblog.com/2008/10/22/neomercantilism-and-sloppy-central-bankers/
Your last para made me double check to see if the blog post title was “THE SWEET SPOT FOR OIL” (no pun intended) Tim