Price of oil

Long before the carbon debate began (at any rate, long before the masses became involved) one of the key concerns was how long the oil would last. Figures ranged from years to decades (a common figure was about 50 years if I recall). I never used to consider what this actually meant. There are two aspects to oil availability simplistically. The first is the physical availability. There seems to be no clear consensus on the remaining oil reserves around the planet. Each time estimates are made they are based upon the financial viability of extractable oil rather than actual physical amounts.

What this means is that over time, new fields are discovered and old ones, through more modern extraction techniques and technology, are able to extract more. Add to that the increase in the price of oil and then the amount of exploitable oil goes up considerably.

But at some point the second of the aspects of oil availability kicks in. At what price level to the consumer for retail oil products and indirect product costs does the oil supply become irrelevant? To put it another way, when, as a consumer, will oil be an irrelevance to me because of cost.

The consequences of the latest oil price increases to $200 plus per barrel were an eye opener. The reality has started to hit home to the masses that oil availability is not the key issue here (i.e. we will not run out of oil) but we will very rapidly meet the point where oil is simply to uneconomical to rely on for its current applications.

In the UK with petrol currently at about 1.14 pounds per litre we are already seeing the rumbles of dissatisfaction. To fill up my tank now costs me over 70 pounds. I think twice about taking the car (great I hear all the green amongst you shout). I could buy a smaller car, more fuel efficient, and that delay the problem a little more. But it is not the answer. At some point the cost of oil and petrol will reach the point where many people simply will find it impossible to run cars on economic grounds only. Now add to that the people in the country whose heating systems run on oil (significant numbers) and they will be forced to reduce heating their house.

Oil prices have more far reaching effects though. Reducing the amount we drive (easy for me to say living in London) is one thing, but goods have to be moved and manufactured and oil will have a direct cost on that. For example, trans oceanic logistics. Oil represented about 20% of the cost of shipping. At $200 dollars a barrel it represents about 80%. To move a 40ft from China to the US used to cost about $2000 and at oil prices we are starting to see could be as much as $8000 with further increases (potentially double) in the next 5 years.

It is now estimated that the cost of fuel makes up roughly the same amount in transport costs as labour does.

The effects will echo around the globe. China's dominance in manufacturing may come to an abrupt end. Labour costs and general production costs are lower in China but these savings can rapidly be overtaken when the transport costs over that distance are swallowed by fuel costs. While transport is so heavily reliant on oil it will mean a radical change to the current economy of the globe. Those developing countries hoping to follow in the footsteps of China and India for growth may be disappointed on two counts. The first is the inability to leverage their cheaper labour and the second will be the cost of importing goods to support their industries.

What that clearly means is that the cost of all goods is going up. Every price for nearly everything we buy is connected to some extent to oil. To avoid inflationary explosions (i.e. wages following oil price increases) we will simply have to do without.

So how long will the oil last? If the physical oil has 50 years left at current prices and rates of consumption the we may see the oil effectively run out in as little as 10 to 20 years. Obviously the drop in demand from price increases will ensure that oil does not run out but the physical amount left is not relevant above a certain price point.

The current focus on the carbon problem of global warming causing us major problems over the next 50 years is going to be nothing compared to the issues and consequences of oil availability. We can hope that one might help balance out the other but with the entire global economy based upon oil at some level (direct or otherwise) the planet is simply not prepared for this eventuality. The reality will be that both will hit and largely over the same time period. Without this even being on the agenda of any government at the moment the likelihood of the sweeping change needed to mitigate this issue is slim.