Why is the Price of Oil Falling?

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As I was filling up my bike today, I managed to fill the tank from reserve light to the brim for under £20. It’s been a while since I managed to do that. £1.05 per litre, down 25p over the last six months. But why is the price of oil falling?

There are a number of theories, but the main reason is market competition.

For many decades the oil cartel OPEC closely matched supply with demand to keep the price of oil as high as it could get away with. And you can hardly blame it. The world wanted oil, and OPEC had most of it, and with no significant rival they charged whatever they saw fit.

Had OPEC existed in a truly free energy market, natural competition for customers would have made sure that oil producers were kept honest about how much they charged. So what has changed?

Carbon

The main push towards alternatives has been the great nonsense of global warming and the excuse of governments and organisations all over the world to not only extract taxes from people under the guise of environmentalism, but to create millions of jobs and a whole tranche of new economy in the process.

Global warming is a fact, but man made global warming (MMGW) is still under debate. The more the IPCC states the eminency of its top scientists, the less I’m likely to believe their words. I believe what sounds right to me, not what I’m told, no matter how intelligent the individual speaking.

I do not believe that carbon dioxide is in any way bad for the planet. The notion of man made global warming is like a lot of science; much more speculation than substance. You can prove anything you want given a big enough set of data, and the benefit of the baffling effects of statistics.

While I disagree with the IPCC findings, I do agree with the direction that their hypothesis (and it is just that until proven) has us heading. Moving away from oil has to be good for the planet. The money we spend on defence and wars to secure energy supplies would be better spend on saving lives and uplifting the planet. Energy could and should be free and freely available to the whole world.

Whether or not governments and their politicians actually believe that carbon is bad for the environment, they have a wonderful excuse to raise revenue through taxation from those who are economically active. Should anyone try to accuse them of foul play or daylight robbery, they pour on the environmental guilt-trip and point at their celebrity scientists sitting pretty in the IPCC.

As governments have driven on with their climate policy, spending billions decarbonising the way we live; they are moving transportation fuels & heating fuels away from oil, and shifting public perception towards alternatives.

I believe we have reached and passed peak oil. By peak oil I mean the consumption of oil, and not the production of oil (the two factors are closely linked, but just as CO2 and global temperature have been linked in the MMGW debate, they have mixed up cause and effect). We are investing heavily in more efficient, cleaner, and (in the long run) cheaper energy supplies.

Whether you believe in MMGW or not, very few would deny that a replacement for oil is long overdue; I love an internal combustion engine going full chat as much as the next man, but who wouldn’t benefit from a cleaner, cheaper, more abundant energy source. Apart from OPEC.

So the cause of the decarbonisation is twofold;

  1. The rising cost of oil, and
  2. The fears of destroying the planet and the government taxation that has come about as a result.

As the world is moving rapidly towards alternative power sources, as companies like BMW tool up for carbon fibre chassis’d electric and hybrid electric cars, we can see global momentum is building.

Meanwhile in the Middle East, OPEC are getting nervous. Its customers are going away. The US has had enough of being held over a barrel, exporting billions of dollars abroad for its oil, and has discovered its own shale oil and shale gas supplies. Others are finding Russian Gas (only slightly) more appealing than expensive oil, or looking into fracking to produce their own.

Remember the Whalers?

There is no shortage of oil, but its high price has led to market competition. As Amory Lovins brilliantly put it:

In 1850, whaling was big business. Whale oil lit most houses. But as whales got shy and scarce, the price of whale oil drifted up. This elicited competitors, chiefly synthetic oil and gas made from coal, that grabbed more than five-sixths of whale oil’s lighting market in the nine years before even cheaper oil was first struck in Pennsylvania in 1859. The astounded whalers ran out of customers before they ran out of whales. Whales were actually saved by profit-maximizing capitalists. The whalers were soon reduced to begging for federal subsidies on national-security grounds

The free market did its work. And so it will be with oil. The alternatives to oil will bring about the end of the oil business long before oil itself runs out.

There is plenty of oil in the ground, but unless the oil producing countries can drive the price down even in the face of government taxation, they will lose customers to their competitors long before they run out of oil. OPEC can no longer have its own way; the monopoly market is gone.

OPEC’s choice is a simple one; produce oil more cheaply and sell more of it before their customers go elsewhere, or keep prices high and drive customers away more quickly.

Oil producers, like the whalers that went before them, will become redundant, the question is; will it happen sooner or later?