Confero Winter 2015: Issue 9 | Page 32

On Topic replacing our oil & gasoline based infrastructure. The problem is energy density: hydrocarbons are really good at packing a lot of power in a small volume, cheaply. We have no doubt that someday, perhaps within a few decades, we can create a cheap, energydense, battery alternative which will utterly transform our current oil-based transportation infrastructure. For the foreseeable future, however, we’re stuck with gasoline-based cars. Moreover, for poorer nations and their businesses, there is exactly one trump factor for deciding which energy source to use: today’s price. The environmental impact of fossil fuels is a far away cost which is debatable in scope. Worrying about global warming is a luxury only the very rich can afford. Similarly, the implications of supporting another petro-dictatorship are only going to be felt by rich, developed countries. Even though alternative energy sources are coming down in price, the widespread, continued adoption of fossil fuel powered machines suggests oil is still king. ... these supply-scares in the traditional oil supply regions may have bolstered existing oil prices, but these potential limitations did not compensate for the additional access to oil and natural gas across North America as a result of new technology. ” investment banks (Morgan Stanley, Goldman Sachs, and others) suggest more struggles for the oil producers in the near and medium term, with oil prices on a secular downward trend. What happened? Supply If asked to explain a price-drop for a key commodity, an economics student might take a look at a classic supplyand-demand graph and ask if the supply of that commodity had increased. Generally speaking, if the supply for goods increase, you can expect the price to fall. So, we’ve established two ideas. First, oil is key to modern machinery. Second, petroleum-based machines are still the least expensive, most viable technology, which have been honed and popularized over the past 100 years. Given these two factors alone, one would think oil should become inexorably more dominant over time as it becomes more ingrained in the global economy. Actually, if we were to look at global news over the past year, we might expect difficulty in maintaining a steady supply of oil and natural gas. For example, key energy exporter Russia threatened shutting down its natural gas supply to Europe over Ukrainian conflict sanctions. Iran still faces sanctions over its nuclear energy program, which further constrains supply. Militant Islamists in the Middle-East and North Africa threaten the existing oil infrastructure. Finally, an Ebola scare in West Africa could stifle regional trade & production. However, the price of oil has recently plummeted to multi-year lows. At the time of writing this article, December 8th, the price of oil hit $63 per barrel – the lowest it’s been since mid-2009. Moreover, the forecasts from large In the final analysis, these supplyscares in the traditional oil supply regions may have bolstered existing oil prices, but these potential limitations did not compensate for the additional access to oil and natural gas across What’s happening to oil and natural gas now? 30 | WINTER 2015 North America as a result of new technology. Hydraulic fracturing (fracking) from the Great Lakes region, through the upper plains, and down into Texas has created a glut in oil and natural gas. Oil sand refining in Canada has reached an efficient level of sophistication to become profitable during the prior decade. The previous generation’s dream of North American energy independence is reality; in fact, we’re now trying to figure out how to effectively transport excess natural gas out of the US for sale. Certainly, the traditional consortium of oil suppliers—OPEC, Organization of the Petroleum Exporting Countries— could have restrained their output to try and increase the price of oil. The latest OPEC meeting in late November demonstrates some states within the cartel are in favor of limiting production, but there are a few more problems to limiting supply now. First, OPEC members have less combined control of global oil supply. The United States and Canada are not in OPEC and they have the ability to ramp up production if OPEC limits supply, potentially taking even more market share. Yes, there would be necessary lead time to increasing oil production which would probably boost the short-term price of oil. However, boosting the shortterm supply of oil now may simply incentivize production (i.e. drilling more fracking wells) and encourage higher efficiency output techniques (i.e.