Why We Need Oil

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When will the world completely run out of oil? Probably never. I enjoyed Mad Max as much as everyone else, but the inner Tony Robbins in me tells me to be more optimistic. It's almost certain that the day will never come when there's literally not a drop of oil left.

What is nearly written in stone, however, is that there will come a time when oil becomes so expensive that it won't be as practical to use as readily as we do now. And here's a scarcely followed truth: Oil is used for much, much more than shuttling you around town.

Spoiled with oil
Odds are there are more oil-based products within shouting distance than you can think of. Everything from Apple (Nasdaq: AAPL) computers to Callaway (NYSE: ELY) golf balls rely on crude for what is probably petroleum's No. 2 claim to fame: plastic. But even if we all gave up their cars and went back to the pre-plastic days, we'd still be an oil-dependent world.

Take agriculture, for example. Most folks people probably take for granted the logistics of something as simple as food. In America, food completes a 1,500-mile journey, on average, before making it to your mouth. How did it get there? Trucks, trains, planes, and ships ... which run on diesel and jet fuel. The asphalt the trucks drive on? Made with oil. The tires? Yep, they include oil, too. Tractors, fertilizers, pesticides? Oil, oil, oil. You get the idea.

How about everyday goods? Shampoo, toothpaste, soap, deodorant, paint, lipstick, nail polish, perfume, ink ... all of them use some form of petroleum in production, not to mention transportation. In April, Procter & Gamble (NYSE: PG) CFO Clayton Daley remarked, "Virtually everything that goes into our products comes from crude oil or natural gas or some other commodities.'' Clorox (NYSE: CLX) expects $100 million to $120 million in commodity and diesel cost increases in 2009, in part based on oil's continued price surge. Dow Chemical (NYSE: DOW) recently announced price increases of as much as 20% and then weeks later followed up with an additional 25% increase, largely because of the run-up of two of its major raw materials: oil and natural gas.

Of course, we can make do with higher ink and perfume prices. What could spread a bit more anxiety would be a price increase in essentials such as medical services, which rely on oil for everything from the manufacturing of some medicines to keeping emergency ambulance and helicopter services running. The portion of our health care costs that are linked to the price of oil is probably trivial, but the point is that there's hardly a single industry completely removed from oil's influence.

Give me a break ... enough fearmongering!
The modern oil industry was born in Titusville, Pa., in 1859. Last time I checked, people did just fine before that time. Besides, there's still a lot of oil left in the world, and higher prices make it more attractive for companies such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) to explore and use extraction techniques that weren't profitable before. So why all of the fuss over oil dependency?

As we've seen in the past year, the price of oil can shoot up faster and higher than what seems reasonable. Basic economics tells us that a price increase should lower demand, but oil is such an integral part of the global economy that regardless of price, people have to have it. It takes a pretty sizable price increase for people to scale back demand even a little. When supply dwindles and demand doesn't follow suit, the price will rise relentlessly higher. As we've seen, that situation can raise the cost of nearly everything around you.

None of this should scare you too much. Our plastic knickknacks aren't going away anytime soon. But the next time you think finding the new generation of transportation will completely wean us of our dependence on oil, remind yourself of those "plastics make it possible" commercials.

For related Foolishness:

• Big Oil Ruined My Life
• Think Oil's a Bubble? Think Again.
• Open Your Eyes to Inflation