Oil, demand and government action

With this new US$120 peak, one question arises: “When the heck will a decrease in demand will rush in – floating cape and all – and bring down the evil dr. Price?

It’s been a few years (I’m toning it down a bit with the “few”) since predictions have shown an oil peak to be arriving. Those predictions have varied, but it is certain that new oil discoveries have not follow the rise in demand. That is one of the reasons for this oil price peak – but there are other conjectural elements to it: the dollar devaluation (since as compared to the Euro, oil has spiked “only” around 30%), like riots in Nigeria, the Iraq war, political instability in Venezuela, the Chinese increase in demand and so on.

There is still a lot of oil available. What has to be understood is that, from now on, there will be increasingly less of the cheap oil, that is, the petroleum that is easy and inexpensive to collect and distribute. Saudi Arabia still has large reserves of light/easy oil, but onwards, sources like the heavy oil of Venezuela and the Tar Sands of Alberta will have to come in play to meet the demand.

The problem is that this oil is more expensive to be extracted, and, in order for that to be economically viable, an increase in profit returns will have to come about. An increase in prices would be a way.

So here we face a dilemma in which (in the long term, due to high prices) a two-pronged phenomenon will develop. On the one hand, demand will decrease (since alternative sources of energy will start looking more profitable) thus driving the price down and, on the other hand, investments in not-so-cheap oil will become attractive, which would increase the supply, maybe cause a drop in prices and bring down profit margins.

If oil demand stays where it is (that is, increasing by the minute), profits won’t go down and more oil will be driven into the markets; and it is more likely for new investments to move into the more expensive oil than old money (that hasn’t returned all the expected profits) to be pulled out and allocated in different businesses.

Governments have the inescapable, possibly irreplaceable, chance to act and make sure that no more money is put in oil. Now tell that to Venezuela, Nigeria, Saudi Arabia, Russia and Brazil…