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October 9, 2000

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Subject:  Re: Market collapse
Author:  GFPE

Sammi:

Actually, Saudi Arabia is quite vocal that it wants oil to be traded in a band between $22 and $28/barrel. The Saudis are generally favorable to increasing supply here, and they were important in convincing OPEC to raise its quota. But the Saudis have also been pumping more than they agreed upon with OPEC, and it's unclear whether they will pump that much more extra on top of the production increases agreed upon. Venezuela, on the other hand, has opposed increasing production and if it were not for the influence of poorer OPEC countries like Venezuela, the Saudis and UAE would have been pumping more to begin with.

However, OPEC can obviously influence world oil prices by changing production levels. OPEC nations pump 40% of the world's crude oil bought, refined and used, but it's the biggest single bloc, and the supply of that 40% can absolutely affect world oil prices. That's born out by history, where a number of oil crises brought on directly by OPEC agreements to lower supply have occured. Now the U.S. economy is less proportionally dependent on oil than in the 70s (at least by the measure of oil consumption over total GDP, which shows the overall relationship of dollars of value per dollar of oil consumed).

The thing that goes against all principles of free trade is that OPEC colludes on supply. Since oil is traded as a commodity, this is a crude and indirect form of price fixing. Supply/demand. If the WTO is for anything, preventing artificial supply and price conditions resulting from collusion or other barriers (like protectionist tariffs), is it. The only way that production would rise or fall competitively with demand is if each nation in OPEC acted completely independently. That is the essence of the free market. But that won't come from OPEC: it's obviously not in their best interests to disband, since more likely than not, the price of oil would go down, especially as the Saudis and the wealthier OPEC nations pumped more oil.

Can oil exploration and utilization in the U.S. reduce dependence to the point where OPEC's share is not relevant? No. Impossible. Oil prices will always go to the global level, even if we reduced dependence on foreign oil drastically. Crude oil is traded as a commodity. Is there even enough reserves onshore and offshore in the U.S. to significantly reduce dependence in the first place? It's unclear. I have read from an oil expert that the wells in the Western continental U.S. can produce an average of 2 barrels/day, while Alaskan wells can produce an average of 300 barrels/day, but in certain parts of the Middle East (e.g. Saudi Arabia, Kuwait), the average per well production is thousands of barrels/day. Plus, the cost of removing oil from the permafrost of Alaska or under the sea is much higher than the getting it out from the reserves underneath the desert in Saudi Arabia.

The final problem is that no matter how much oil there is, and there has proved to be more than thought twenty years ago, it is a finite resource. At some point, it will be tapped, and in fact in the easiest-to-access reserves in the U.S. that is the case. That is the main reason why the U.S. depends more on foreign sources now: the reserves that were the easiest-to-drill-and-pump have diminished, while oil demand has grown (in absolute terms). The talk oil exploration is of using new technology to get at harder-to-get sources, but that's always going to be more expensive than the enormous reserves that still exist in other parts of the world and are easy-to-exploit, like in Saudi Arabia. At some point, even those will be depleted, but there's no precise way to determine just how much is under there.

The only real way to reduce dependence in the long-term is other sources. Fuel cells are a promising technology, for example. Fuel cell vehicles and motors that are not as limited as electric have been prototyped and the earliest specialized applications are now starting to be marketed. Now it's a question of economics. The companies doing this need to make the cells more miniaturized and more efficient and then get over the initial hump to economies of scale before they are viable on the market. One problem is that as oil prices go up, that influences the overall strength of the economy and inflation (really strong historical correlation), and so the price of viable alternatives also goes up, ironically. But there will be a shift eventually.


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