Why Oil Costs So Much

Perhaps you have seen the circus in the U.S. Congress recently, where they have proposed "windfall" profit taxes on the five largest oil companies. And, where one Senator pleaded with a CEO in a strained voice, asking "Don't you see what you're doing to your country?"

Or, in another fit of irrationality, Congress' newly proposed legislation to undo the Carter reform of pricing oil in a commodities market. They have proposed this to thwart the greedy Wall Street speculators.

Surely, there must be evil lurking somewhere. There must be some scapegoat to pay the price.

But, it isn't to be. I did a little research on my own a few days ago, and convinced myself of what BP has provided in its own Statistical Review of Global Energy 2008.

In their report, they point out that oil production FELL by .2% in 2007, despite through the roof prices. In fact, I found on Wikipedia that oil production has been roughly flat since the beginning of 2005.

What does this mean? Normally, when demand falls, the price drops, and then the supply falls. The reason that supply falls is that each oil well has a price per barrel where it makes economic sense to remove it from the ground. In other words, if it took $100 per barrel to pump the stuff out of the ground, why do it if the price is only $90 per barrel on the open market? You'd be losing $10 per barrel that you sold, and you wouldn't last long in the oil business.

Up to 2005, this relationship is solidly in place. You can put the price chart next to the supply chart, and see them moving together. But starting in 2005, the production stops going up; it's as if it hits a limit. The price keeps rising, because the world economy is growing, and it needs more oil to function. Those prices should have caused more expensive barrels in the ground to be pumped up - but they haven't.

Why? My thinking at the moment is that high prices are stimulating exploration and production - the problem is that old production is falling away, as old fields decline. It may be that technology will bail us out of this (new ways of pumping previously unreachable oil), or that new production projects that can meet the world's demand have long lead times. But, at 3.5 years of elevated prices (and counting), my hope there is starting to run thin.

Basically, this is supply and demand. Not greedy speculators and not evil oil companies. This is the result of billions of people around the world emerging from poverty and improving their material life style.

A Warning

Be wary of messianic politics. You have been warned.

ING Direct Buys Universe

I just got an email stating that one of my brokerage accounts has been purchased by ING. Two institutions in a two month period? Coincidence? I think they are out to own my life.

Oil Nears Record Highs

You've heard for a few days now that the price of oil has set records in recent days. That's true in a sense, but not in inflation adjusted terms. However, at $91/barrell, the price of oil will exceed its all time inflation adjusted high price, which was set in the 1980's. Many people will remember price controls, lines at gas stations, economic turmoil, rationing, and general energy chaos.

Yet, today, it seems to be taken in stride. I think we can thank the fact that every day our economy becomes less and less energy intensive. Which means, that we are able to produce a dollar of GDP with less and less energy input. This is partly due to the changing nature of our industries, as we move towards more service industry and less heavy manufacturing, but it is also due to technological innovation that has made almost everything from homes to computers to light bulbs to air conditioners more efficient.

And, the optimistic view is that if the price of oil hasn't killed the economy yet, it probably won't, and every day that it is high is another day that adds impetus to diversifying energy sources and making things more efficient. I think all of that is pretty good.

Credit Problems Getting Personal

It may seem like I rant about far away things and esoteric topics, but in the last week my life has personally been touched by the credit problems currently going around:
1) My bank failed and was closed by the FDIC (the major bank regulator). NetBank was one of the first internet banks, and I never had much trouble with it, but apparently they bought the wrong sort of mortgages and the government forced a sale. The checking accounts and other liquid assets have been purchased by ING Direct.
2) My mortgage was sold. Not sure what the deal is, but ABN Amro closed down their mortgage servicing web site, and sold my mortgage to Citi Group.

Oh, well. The ING and Citi websites seem better than the others, so I guess its for the best.

FPL and solar-thermal energy

Isn't $80/barrel oil grand? Recently, Florida Power and Light announced that they would build a 300MW power plant (that's pretty big) somewhere in Florida. The system uses mirrors to boil water in pipes placed above the mirrors to generate steam. This steam is then stored, and used to drive turbines that generate electricity. The plant will be able to operate for up to 20 hours without sunlight, to help overcome cloudy days and nights.

The costs are competitive, and in some cases cheaper, than coal and natural gas plants. The company to build the plant is Ausra.

You will see a lot more of this.

Ah, normality

So, after all my hand wringing about corporate credit markets, it appears that today, the day that two very large banks announced the damage that the subprime mortgage mess inflicted to their profits, the Dow Jones Industrial Average has set an all time session high. Apparently, fears were a bit overblown, and a major risk seems to be evaporating.