You Think Oil’s Going Down? Think Again
by Eileen Gunn | MainStreet.com

If you aren’t counting your nickels and dimes (and $20s and $50s) at the pump just yet, or cutting back on air travel, or finding ways to cut your heating bills, you soon will be.

I was talking this week with Geoffrey Heal, a professor at the Columbia Business School, who believes that “the sky’s the limit” when it comes to oil prices, and that it’s possible we haven’t even gotten airborne yet.

He also believes that as oil reserves grow scarcer and oil prices climb beyond the $125-a-barrel range in which they’ve been trading, it will increasingly created both challenges and opportunities for businesses and change the way we go about our lives.

Heal has lately been thinking a lot about Harold Hotelling, a preeminent economist and Columbia professor in the 1930s and ’40s. Hotelling had a theory that once a society determines that a resource like oil is finite, its price will keep climbing higher and higher. People will gradually begin seeking an alternative before it actually runs out because it will become steadily more unaffordable.

We’ve reached this inflection point with oil, Heal says, because we’re using it up faster than we’re finding new reserves, a situation that we didn’t face even during the oil crisis in the 1970s.

Consider some statistics.

Americans now use twice as much oil as Saudi Arabia produces every day, according to the Energy Information Administration.

The 30 countries in the Organization for Economic Cooperation and Development account for two-thirds of the world’s daily oil consumption — with the US leading this elite pack by a wide margin — but the real growth in demand is happening in the developing world. In the 1990s, oil use grew by 35% in non-OECD countries, vs. 11% in the developed world, according to the EIA.

Most of this developing world growth was happening in Asia, where the EIA estimates that oil consumption will grow by nearly 125% between 1995 and 2015. Anyone who has seen the streets of cities like Hanoi, Saigon, Bangkok, Phnom Penh, Shanghai and Delhi increasingly clogged with mopeds will tell you they wholeheartedly believe it.

There are reserves we could tap into, you say, but Heal points out they are only a drop in the gas tank.

The U.S. Geological Survey estimates that there are about 90 billion barrels in the controversial Alaska National Wildlife Refuge, and another 40 billion barrels or so have been found off of Brazil’s coast. But global oil consumption is more than 30 billion barrels a year and growing (U.S. consumption is more than 7 billion).

“These are regarded as huge discoveries,” says Heal. “But you’re talking about four years worth of oil.”

Additionally, he says there had been a deeply held belief among people such as himself that oil prices would top out at around $60 or $70 a barrel. The idea was that at this price it would become financially viable to turn coal into an oil equivalent or to extract oil from Canada’s tar sands. So there would be new supply. But no one counted on global warming.

“Both of these processes create a lot of carbon dioxide,” he notes. “No one wants to invest in them in a world where we’re facing emissions caps.”

All in all, “We always knew in principle that oil was exhaustible, but now it’s beginning to look exhaustible,” he concludes. “The more you use today, the less you have tomorrow.”

And the more we use now, the more it will cost tomorrow. We’re already seeing changes in business and consumer patterns that are likely to get more pronounced as this happens. “Anywhere it isn’t essential, people will switch away from oil,” he says.

Some examples of change that we’re already seeing:

Heal says that the biggest change he’s seeing is in the future business leaders of America who he teaches at Columbia Business School:

“There were always a few students, two, three, four percent of the class, who were interested in the environment, but for the most part, if I brought up climate change I’d be greeted with yawns,” he says. “Now hands go up and they ask a lot of questions.” Compared with just five years ago, he says, students are more “aware and concerned.”

He adds, “I think that when they get into senior management positions, it will have an impact.”

No one can say where oil prices will be by then, but if Heal is right, and I have a feeling he is, they are sure to be higher.

Related Articles:

* Deal With Broken Phones the ‘Green’ Way
* How to Banish Junk Mail
* How to Decode The Hidden Dangers of Plastic Bottles

Random Posts

• Exciting Changes at Geezeo! (0)
• The Sky Is Not Falling (2)
• Five Part Time Jobs that Will Help You Get By (1)
• Do Geezeo users spend more on iphones, or ipods? (3)
• NEW! Cashflow, Enhanced Budgets, and Split Tags (0)

This entry was posted on Monday, August 4th, 2008 at 1:44 pm and is filed under Budget. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.