Re: Petroleum question

Posted by wisbaker on June 11, 2014 at 18:17:59 from (173.30.33.15):

In Reply to: Petroleum question posted by wile E on June 11, 2014 at 12:41:01:

I remember reading something a few years back, GM felt they needed to develop high compression engines capable of running on alternative fuels in the 1930's. The reason predictions had us running out of oil in the 1940's.

My father in law was an Army Air Corps crew member during WWII, as he spent a good deal of the war in school he was asked to stay on a few years after and was part of the Army of Occupation in Japan. Once out of the Army it took him a year to complete his EE degree. In the late 40's he hired on with Schulmberger and worked for them almost 40 years doing oil well services and gas and oil exploration and well development. He stated to me there was a lot more oil and gas out there than we knew about, but it was getting harder to find and harder to get out of the ground.

Petroleum resources will behave like any resource with respect to economics in the supply and demand arena. For most of my lifetime gasoline has not tracked with inflation, Gasoline was relatively more expensive when I was in High school and College. The recent spike in the last 10 years brought it to about parity with other commodities.

Basic economic theory, if the price goes up producers will respond by trying to bring more product to market. The increased price makes previously unprofitable sources now attractive. the maker responds to an increased demand (that's what drove the prices up) by supplying more product. If demand goes down it will drive prices down, so if everyone parked their cars, trucks, tractors and airplanes for a month or so we would see a price decrease that would last until the aforementioned cars, trucks, tractors and airplanes went back into use. A recent example is last winter's cold raised prices on heating oil and propane and fuel used to generate electricity. The weather drove an increase in demand and the price went up, the increase in price brought more fuel on the market.

Another basic economic premise is that if the supply of a commodity is reduced the price will go up. We have seen this in recent history examples: when hurricane Katrina shut down a significant portion of our oil production and refining capability gasoline prices spiked. Same thing when the Deep Horizon oil rig blew up or when big oil simultaneously shuts down multiple refineries for "routine maintenance" during the peak driving season we see a price spike.

The relationship between the change in price and the change in demand is called elasticity. Factors that determine elasticity are suitable substitutes and how bad the consumer needs or wants the product. Examples if the price of gasoline were to jump $1.00/gallon tomorrow we may eliminate non essential driving (cancel vacations, shop closer to home, eliminate our night out or just plain use our cars smarter) a long term spike in cost may move us into more fuel efficient vehicles and permanently change our shopping and travel habits. If the price of beef were to jump $1.00/ pound we'll eat less beef, but probably eat more chicken and pork or switch to cheaper cuts of beef, like round steak instead of sirloin, chuck steak instead of round steak, ground beef instead of chuck steak. If the price of a prescription you need to stay alive jumps you're not able to substitute, you'll take the same dose and make up the increased cost by reducing expenses elsewhere (food, fuel, entertainment, clothing).

Oil resources will be the same way, as it becomes more difficult to extract the oil the price will go up, or the backwards or downside of increasing price brings more product. Simply oil that costs $130/ barrel to extract won't make it to a $100/barrel market. If the price goes up to $135/barrel that oil will arrive on the market, but the oil that costs $140/barrel to extract will stay off the market. So the basic concept once all the oil that can be profitably extracted at $100/barrel is used up the price of oil will go up and the demand from the market will adjust to the price increase. This will happen over and over with each step driving the demand down a little bit. There will always be oil (gasoline, propane, natural gas) available, it's just the cost will drive consumers out of the market. There might very well be alternative fuels available that probably won't be as good as petroleum, cost more and we'll use a less of them. This means we'll travel less, adjust our life styles to use less fuel, live closer to work, drive smaller vehicles, carpool or use public transportation.

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