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.