Cheap Oil

Wednesday, April 26, 2006

Cheap Oil

'You steal our wealth and oil at paltry prices because of your international influence and military threats. This theft is indeed the biggest theft ever witnessed by mankind in the history of the world.'

As Neil pointed out our President is investigating the recent surge in oil prices. He hopes nobody is cookin' the books like ol' Kenny Boy. We've all heard about the enormous profits oil companies are making. Oil is just way too expensive, right?

Or is it? Is it possible that we're still getting it at bargain prices? Are they bargain prices or is it really just theft as Osama Bin Laden claims? How do we arrive at a value for such an amazing resource?

Oil, is the miracle product of the 20th century. It brought mankind potable water, transportation, airplanes, modern agriculture and a host of modern conviniences. It or another form of energy is an indispensable requisite for life as we know it. Our entire way of life has been changed by oil and petroleum based products. But what is it really worth?

According to energy investor Matthew Simmons:

Saudi Arabia assumes its cost to produce oil is $0.40 to $0.50 per barrel!

Imagine that! Those dirty bastards are charging us $75 a barrel for something that only costs them $.50 to make? But are we getting ripped off? Nike charges $150 for a pair of sneakers it costs them $5 to make. I'd bet you the oil, even at $75 is a better deal than the sneakers.

Matthew Simmons goes on to analyze the value of oil and the question of solvency in regards to the supply chain. For instance, if you're Nike and trying to maintain a supply of those cheap shoes you sell for so much, you'll have to at least make sure that your supplier, though not the workers, is solvent, not broke. Simmons asks a similar question in regard to the suppliers of our oil.

For instance, he noted that in 1970 there were 6 million people in Saudi Arabia. By 2000 it was 21 million, today it is 24 million and it is expected to be 40 million people in 2014, just 10 years from today. Assuming Saudi Arabia produced 6 million barrels per day and wanted to give each of those people a $15,000 per year lifestyle, it would take $50 dollars per barrel. He suggested that to give the rest of OPEC such a life would require $182 per barrel. If your key supplier is broke, you have a big problem. The western world is living at the expense of the underdeveloped world.

There's no absolute method to determine the value of oil. The cost of extracting it and putting it in a barrel is certainly no measure. And while I applaud Mr. Simmons efforts to approximate a fair price for oil, even his analysis is short-sighted. Once we realize that we've used up about half of all known oil reserves and that we will never produce as much oil as we are producing right now, the only logical conclusion is that we're getting one hell of a bargain. Bush's political blunder in the Middle East is aimed at maintaining our hold on these vast energy supplies as the demand quickly ourpaces the supply.

Published in: on April 19, 2006 at 10:16 pm  Leave a Comment  

The URI to TrackBack this entry is:

RSS feed for comments on this post.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: