Tag Archives: oil

Drilling Forward

By INVESTOR’S BUSINESS DAILY | Posted Wednesday, September 24, 2008 4:20 PM PT

Energy: In a stunning defeat, congressional Democrats were forced to allow the quarter-century-old offshore drilling ban to expire. But the fight has only begun, with the struggle now shifting to state legislatures.


Read More: Energy


 

Funny how the Democrat-controlled Congress can’t get the things it wants enacted, can’t even get a single appropriations bill passed, yet minority Republicans this week succeeded in ending a supposedly sacrosanct ban on oil and gas offshore drilling that dates back to the early 1980s.

It was an unexpectedly powerful knockdown of Democrats and their enviro-extremist allies, but they are not yet counted out.

GOP Sen. Jim DeMint of South Carolina noted in a letter to Senate Majority Leader Harry Reid, D-Nev., the possibility that Democrats would “use environmental lawsuits to block exploration until they can reinstate these energy bans after the November elections.” DeMint warned Reid that it “would be a major mistake.”

So with the ban ending, what are the next moves toward reducing America’s dependence on oil from hostile regimes in places such as the Middle East, Russia and leftist Venezuela?

DeMint has introduced a bill to expedite drilling leases, ensure that states share in oil and gas revenues, and prevent frivolous litigation designed to delay exploration for and production of oil.

Meanwhile, some state officials are already looking forward to the benefits for their citizens.

“The potential royalties to our state could be significant and could jump-start our economy in the midst of rising unemployment rates,” South Carolina State Sen. Shane Massey, a Republican, told the Greenville News.

Massey noted that Virginia has already made moves to get into the U.S. Interior Department’s five-year offshore drilling plan.

In California, where Gov. Arnold Schwarzenegger and leading Golden State Democrats adamantly oppose offshore production, a majority of Californians now favor drilling. Even the board of supervisors of Santa Barbara County, site of an infamous 1969 oil spill, last month voted to support drilling.

There are tens of billions of barrels of oil and hundreds of trillions of cubic feet of natural gas in our Outer Continental Shelf waiting for American consumers. That doesn’t include the 10 billion barrels of oil in the North Slope of Alaska. The oil shale in our Western states could provide hundreds of billions, if not trillions, of barrels of oil, dwarfing the crude reserves of current No. 1 Saudi Arabia.

House Minority Leader John Boehner, R-Ohio, is calling the end of the ban just the beginning of a new comprehensive energy policy. The House Republicans’ American Energy Act would expand drilling in remote areas, both on land and at sea, plus employ conservationist measures and promote alternative fuels.

It would also establish a “renewable energy trust fund” financed by oil revenues and use revenue sharing to give states an incentive for increased oil production.

According to Boehner, “If Democrats continue to block a vote on this plan, just as they blocked a real debate and vote on the outdated drilling bans for months on end, Republicans and the American people will hold them accountable.”

Republicans are obviously basking in a congressional victory few expected. With public opinion so transformed, and oil drilling now an issue that Republicans have proved they can use to embarrass Democrats, can this year’s presidential and congressional elections also be transformed to the GOP’s advantage?

The answer will have huge implications not just for energy, but for both our economy and our national security.

 

McCain wants to lift ban on offshore drilling

  • Story Highlights
  • President Bush plans to ask Congress to lift offshore drilling ban Wednesday
  • McCain says he opposes ban; states should decide
  • Current law bans drilling in most of the United States’ coastal waters
  • McCain would consider incentives for states that allow coastal exploration

(CNN) — Sen. John McCain on Tuesday proposed lifting the ban on offshore drilling as part of his plan to reduce dependence on foreign oil and help combat rising gas prices.

“The stakes are high for our citizens and for our economy,” McCain, the presumed Republican nominee for president, said at a press conference Tuesday in Houston, Texas.

Hours later, White House Press Secretary Dana Perino said President Bush on Wednesday will ask Congress to lift the ban on offshore drilling.

Bush has long called for opening the Arctic National Wildlife Refuge in Alaska to oil exploration, but Perino said he now wants to go further.

“For years, the president has pushed Congress to expand our domestic oil supply, but Democrats in Congress have consistently blocked such action,” she said.

Earlier in the day, McCain, describing the high price of fuel, confused the cost of gallons versus barrels, which drew laughs from the crowd and the candidate himself. He quickly corrected himself.

“And with gasoline running at more than $4 a barrel … a gallon … I wish … $4 a gallon, many do not have the luxury of waiting on the far-off plans of futurists and politicians,” he said.

“We have proven oil reserves of at least 21 billion barrels in the United States. But a broad federal moratorium stands in the way of energy exploration and production. And I believe it is time for the federal government to lift these restrictions and to put our own reserves to use.”

McCain’s plan would let individual states decide whether to explore drilling possibilities. Video Watch a McCain adviser describe the proposal »

The proposal could put McCain at odds with environmentalists who say it is incongruous with his plans to combat global warning. California Gov. Arnold Schwarzenegger, a McCain ally, opposes offshore drilling.

Florida Gov. Charlie Crist had expressed opposition to exploring coastal waters, but he said this week he supports McCain’s plan to lift the moratorium and would not rule out letting his state choose to drill offshore.

“It’s the last thing in the world I’d like to do, but I also understand what people are paying at the pump, and I understand the drag it is on our economy,” Crist told the St. Petersburg Times. “Something has to be done in a responsible, pragmatic way.”

The current law, which has been in effect since 1981, covers most of the country’s coastal waters.

Many officials from coastal states oppose offshore drilling because of the risk of oil spills. Environmentalists want offshore drilling to stop to protect oceans and beaches from further pollution.

“The next president must be willing to break with the energy policies, not just of the current administration, but the administrations that preceded it, and lead a great national campaign to achieve energy security for America,” McCain said Tuesday.

McCain on Monday said incentives could possibly be provided for states that choose to permit exploration off their coasts, adding that “exploration is a step toward the longer-term goal.”

Tuesday’s discussion marks the first in a series of talks about America’s energy security that McCain will hold during the next two weeks as he lays out his plan to reduce the country’s dependence on foreign oil.

McCain opposes drilling in some parts of the wilderness and says those areas must be left undisturbed.

“When America set aside the Arctic National Wildlife Refuge, we called it a ‘refuge’ for a reason,” he said.

McCain also criticized the energy policy of Democratic rival Sen. Barack Obama.

“He says that high oil prices are not the problem, but only that they rose too quickly. He doesn’t support new domestic production. He doesn’t support new nuclear plants. He doesn’t support more traditional use of coal, either,” McCain said.

“So what does Sen. Obama support in energy policy? Well, for starters, he supported the energy bill of 2005 — a grab bag of corporate favors that I opposed. And now he supports new taxes on energy producers. He wants a windfall profits tax on oil, to go along with the new taxes he also plans for coal and natural gas. If the plan sounds familiar, it’s because that was President Jimmy Carter’s big idea too — and a lot of good it did us.”

McCain argues that a windfall profits tax will only increase the country’s dependence on foreign oil and be an obstacle to domestic exploration.

“I’m all for recycling — but it’s better applied to paper and plastic than to the failed policies of the 1970s,” he said.

Obama on Tuesday blasted McCain for changing his stance on offshore drilling.

“John McCain’s support of the moratorium on offshore drilling during his first presidential campaign was certainly laudable, but his decision to completely change his position and tell a group of Houston oil executives exactly what they wanted to hear today was the same Washington politics that has prevented us from achieving energy independence for decades,” he said.

“It’s another example of short-term political posturing from Washington, not the long-term leadership we need to solve our dependence on oil,” he said.

Democratic Florida Sen. Bill Nelson also criticized McCain’s plan, saying it would ruin his state’s tourism industry and would not solve the problem.

“I thought John McCain was serious when he said he wanted to make America less dependent on oil. I didn’t think he was a flip-flopper. He knows that more drilling isn’t the solution to high gas prices,” Nelson said Tuesday.

Obama said a windfall profits tax would ease the burden of energy costs on working families. He also wants to invest in affordable, renewable energy sources.

advertisement

Controversy over offshore drilling surfaced in the United States in 1969, after a crack in the seafloor led to a huge oil spill off Santa Barbara, California.

During the 1970s, when many Arab nations launched an oil embargo, many U.S. officials pushed for the exploration of offshore drilling of the coastal United States. Environmentalists responded with loud protests.

CNN White House Correspondent Ed Henry contributed to this report

All About Oil Production and RefiningJohn McCainBarack Obama

Oil and Trouble (Bill O’Reilly)

The gas station guy in my town is exhausted from climbing the ladder every day in order to change the price sign. Of course, it’s up, up and away. High gas prices, I predict, will become the biggest issue in the presidential campaign.

This week, Republican senators blocked a Democrat-sponsored bill that would have imposed a “windfall profits” tax on the five major oil companies. Since these companies made about $36 billion in profits in the first quarter alone, “windfall” may be understating it.

The GOP says the bill would not have lowered gas prices as any tax punishment would be passed along to gasoline consumers. But let me break this to the Republicans gently: Folks are angry with the oil companies. Unless you guys can help bring some relief to beleaguered American working people, the Democrats will wipe you out.

 

Of course, both parties are at fault. Every president in the last 50 years has whiffed on alternative energy. While Brazil emphasized flex-fueled vehicles operating largely on sugar-based ethanol, our presidents and congresspeople took junkets to the Middle East to hug Saudi Arabian oil sheiks. And now, as Reverend Wright is fond of saying, the chickens have come home to roost.

The gangsters that run OPEC understand that technological advances will diminish oil demand down the road. So, they are accumulating as much cash as possible right now. It costs Saudi Arabia about $2 to market each barrel of oil. Last week, those huggable Saudis charged the world $138 for that barrel.

The oil apologists say it’s a “supply and demand” thing. Sure. Here’s a bulletin: When you limit the supply, as OPEC is doing, the demand will skyrocket. Yeah, China and India are using more oil. Yeah, the U.S. dollar is weak. But in most competitive businesses, if your customers want more product — you put out more product. Not in oil. OPEC keeps production down to maximize profits.

So, enough. The oil scam is hammering the U.S. economy, and, if Iran keeps causing trouble, gas prices might double from here. Israel stated this week that it will take military action against Iran if it continues developing nukes. Since I believe the crazy mullahs actually want that to happen because it would inflame worldwide jihad, this is an obviously a crisis situation.

Congress must mandate by law that American car and truck manufacturers begin to produce a high percentage of flex-fuel vehicles. Once that law is passed, gas stations will begin installing alcohol-based fuel pumps. Congress must also drop import tariffs on alcohol-based fuel so countries like Brazil can sell them to us.

We simply have got to get away from the oil cartel. It’s a national security issue.

What say you, John McCain and Barack Obama?


Mr. O’Reilly is host of the Fox News show “The O’Reilly Factor” and author of “Who’s Looking Out for You?”

Voters Waiting For Candidate Who Will Drill

By LAWRENCE KUDLOW | Posted Thursday, June 12, 2008 4:30 PM PT

The recent spike in oil prices and unemployment is dramatically changing this presidential campaign — virtually overnight. The near $20 jump in oil to $140 a barrel, the unexpected half-point increase in the jobless rate to 5.5% (the biggest monthly increase in 20 years) and the resulting 400-point plunge in stocks has created a new campaign issue right before our eyes.

Public worry No. 1 is now oil, jobs and the economy, with the inflationary woes of the U.S. dollar right underneath. The candidate who can connect with these issues will win in November. But so far neither Barack Obama nor John McCain is dealing with the new political reality.

In fact, it’s all about oil right now. The price has doubled over the past year, while the economy has slumped.

But here’s an eye-opener. Recent polling data from Gallup show that the percentage of voters blaming oil companies for skyrocketing gasoline prices has dropped from 34% to 20% over the past year. At the same time, support for more drilling in U.S. coastal and wilderness areas has increased to 57% from 41%.

And the candidates remain blind to these shifts.

Obama continues to lambaste oil companies, while congressional Democrats push for cap-and-trade. They’re missing the point, big time. The public wants more energy and more fuel to cut high prices and spur economic growth. But the costly cap-and-trade plan would produce less fuel and less growth. It would only raise gas-pump prices while mounting a Gosplan-type taxing, spending and regulating program that would be the moral equivalent of Hillarycare on nationalized medicine.

U.S. Rich In Coal

McCain has an opening here. Yet he, like Obama, would have voted for cap-and-trade, which went down to defeat in last week’s Senate vote. And while McCain favors some offshore production and has been strong on nuclear development, he is against drilling in ANWR.

Then there’s the oil nobody is talking about. The Bakken fields beneath North Dakota, Montana and Canada hold an estimated 400 billion barrels of oil. In comparison, Saudi Arabia’s biggest field, Gahawar, has an estimated 55 billion barrels, while ANWR has an estimated 10.4 billion barrels.

Hat tip to Mark Perry at the Carpe Diem blog site for these figures. Perry also is reporting a Bureau of Land Management study showing 279 million acres under federal management where oil and gas could potentially be extracted. But more than half of this is totally off limits. Offshore, where another 86 billion barrels lie in wait, is also restricted. Then there’s liquefied natural gas, oil shale and the various coal-to-liquid carbon-capture and sequestration technologies that would be priced out of the market by cap-and-trade.

The U.S. is the Saudi Arabia of coal, but we can’t produce. We’re still the world’s third-largest oil producer, but we could be the Saudi Arabia of oil if our companies were free to drill. Oil CEOs like Rex Tillerson of Exxon Mobil and David O’Reilly of Chevron keep saying this. But politicians aren’t heeding their message.

Israeli saber-rattling against Iran could have accounted for some of last week’s huge oil spike. And the unemployment story may not be as bad as the May jobs report suggests. An unexpected inflow of teenagers probably bloated the jobless figure by a couple tenths of a percent. And economist Jerry Bowyer points out that an unprecedented hike in the minimum wage may be derailing students looking for summer work.

A Recession Election

In a sign of future job improvement, however, the civilian labor force grew by nearly 600,000, meaning that more people looking for work could signal recovery. Weekly jobless claims are near 350,000, not the 500,000 of past recessions. Overall, at 5.5%, unemployment continues to be historically low.

But the economy is still in a slump, not a boom. And the fact remains that Americans are very worried about the economic outlook. This could be a recession election. And right now, voter economic anxieties are all about oil, even more than the subprime housing credit problem.

McCain has a great pro-growth plan to slash corporate tax rates, a move that would be a strong tonic for jobs and wages. But he must bolster that plan with a new emphasis on deregulated energy markets that can produce a total portfolio of conventional and nonconventional energy, including major new drilling. He should couple that with a strong-dollar message to curb both energy and non-energy inflation, which is shrinking consumer paychecks and damaging corporate profits.

More oil, more jobs, better wages and low inflation. That’s a winning GOP message this fall. But what if Obama gets there first? It’s unlikely, but not out of the question. Either way, voters will move to the candidate who connects with their worries. Right now those worries are up for grabs.

Copyright 2008 Creators Syndicate, Inc

G-8 countries vow to cut dependence on oil

 The Associated Press
Sunday, June 8, 2008

The world’s top industrialized nations and leading oil consumers pledged Sunday to fight surging  energy prices by increasing efficiency and accelerating investment in new technologies while urging producers to expand production.
Energy ministers from the Group of 8, joined by China, India and South Korea, voiced concerns over record oil prices and said producers and consumers would benefit from greater market stability.
The ministers, meeting in the northern Japanese city of Aomori, focused Sunday on how they could diversify their energy sources to both control rising demand for oil and rein in emissions of greenhouse gases blamed for global warming.
“We simply must increase the level and breadth of investment all around the world,” said Samuel Bodman, the U.S. energy secretary.
“That means promoting aggressive investment in renewable energy and other alternative energies technologies, as well as the development of tradition hydrocarbon resources.”
The 11 nations, which account for 65 percent of the world’s energy consumption, are grappling with oil prices that have hit record highs. Prices surged more than 8 percent Friday to $138.54 on the New York Mercantile Exchange.
The G-8 countries – the United States, Russia, Japan, Germany, France, Italy, Canada and Britain – laid out ways of cutting their dependence on oil in a statement.
They pledged to begin 20 demonstration projects by 2010 on so-called “carbon capture and storage,” which would allow power plants to catch emissions and inject them into underground storage spaces.
There were clear rifts, however, on how to approach the expansion of nuclear energy. The carefully worded joint statement called for assurances on safety and security of nuclear materials, but several nations said they were enthusiastic about building new reactors.
“I think we’re on the verge of a new nuclear age and that will be a positive thing for the world,” said John Hutton, the British secretary of state for business enterprise and regulatory reform.
Germany, however, said it would not join the effort. Jochen Homann, the German economics minister, said Berlin was sticking to its decision to phase out nuclear power.
The G-8, China, India and South Korea also established the International Partnership for Energy Efficiency Cooperation to promote best practices in conserving energy.
The ministers met amid rising concerns that soaring oil prices could trigger global economic troubles.
“The situation regarding energy prices is becoming extremely challenging,” said Akira Amari, the Japanese trade and energy minister. “If left unaddressed, it may well cause a recession in the global economy.”
<strong>Seoul to subsidize fuel costs</strong>
South Korea said  Sunday that it would hand out $10.2 billion to its  lowest-income citizens over the next year to offset the rising  price of  oil, Reuters reported from Seoul.
“The superhigh oil prices are affecting not only our country but the whole  world,” Prime Minister Han Seung Soo said. “But the difficulty is  especially severe with our country that  produces not a single drop of oil but is  the world’s fifth-largest oil consumer.”

 

http://www.iht.com/articles/2008/06/08/business/energy.php

Double, double, oil and trouble (Economist)

May 29th 2008
From The Economist print edition

Is it “peak oil” or a speculative bubble? Neither, really

AFTER oil hit its recent record of $135 a barrel, consumers and politicians started to lash out in every direction. Fishermen in France have been blockading ports and pouring oil on the roads in protest. British lorry drivers have paraded coffins through London as a token of the imminent demise of the haulage industry. In response, Gordon Brown, Britain’s prime minister, is badgering oil bosses to increase production from the North Sea, while Nicolas Sarkozy, the president of France, wants the European Union to suspend taxes on fuel.

In America, too, politicians are haranguing oil bosses and calling for tax cuts. Congress has approved a bill to prevent the government from adding to America’s strategic stocks of oil, and is contemplating another to enable American prosecutors to sue the governments of the Organisation of the Petroleum Exporting Countries (OPEC) for market manipulation.

But the most popular scapegoats are “speculators” of the more traditional sort. OPEC itself routinely blames them for high prices. The government of India is so sure that speculation makes commodities dearer that it has banned the trading of futures contracts for some of them (although not oil). Germany’s Social Democratic Party proposes an international ban on borrowing to buy oil futures, on the same grounds. Joe Lieberman, chairman of the Senate’s Homeland Security Committee, is also mulling regulation of some sort, having concluded that “speculators are responsible for a big part of the commodity price increases”. The assumption underlying such ideas is that a bubble is forming, and that if it were popped, the price of oil would be much lower.

Others assume the reverse: that the price is bound to keep rising indefinitely, since supplies of oil are running short. The majority of the world’s crude, according to believers in “peak oil”, has been discovered and is already being exploited. At any rate, the size of new fields is diminishing. So production will soon reach a pinnacle, if it has not done so already, and then quickly decline, no matter what governments do.

As different as these theories are, they share a conviction that something has gone badly wrong with the market for oil. High prices are seen as proof of some sort of breakdown. Yet the evidence suggests that, to the contrary, the rising price is beginning to curb demand and increase supply, just as the textbooks say it should.

Stocks, bonds and barrels

Those who see speculators as the culprits point to the emergence of oil and other commodities as a popular asset class, alongside stocks, bonds and property. Ever more investors are piling into the oil markets, the argument runs, pushing up the price as they do so. The number of transactions involving oil futures on the New York Mercantile Exchange (NYMEX), the biggest market for oil, has almost tripled since 2004. That neatly mirrors a tripling of the price of oil over the same period.

But Jeffrey Harris, the chief economist of the Commodity Futures Trading Commission (CFTC), which regulates NYMEX and other American commodities exchanges, does not see any evidence that the growth of speculation in oil has caused the price to rise. Rising prices, after all, might have been stimulating the growing investment, rather than the other way around. There is no clear correlation between increased speculation and higher prices in commodities markets in general. Despite a continuing flow of investment in nickel, for example, its price has fallen by half over the past year.

By the same token, the prices of several commodities that are not traded on any exchange, and are therefore much harder for speculators to invest in, have risen even faster than that of oil. Deutsche Bank calculates that cadmium, a rare metal, has appreciated twice as much as oil since 2001, for example, and the price of rice has risen fractionally more.

Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude. Instead, they buy contracts for future delivery. When those contracts mature, they either settle them with a cash payment or sell them on to genuine consumers. Either way, no oil is hoarded or somehow kept off the market. The contracts are really a bet about which way the price will go and the number of bets does not affect the amount of oil available. As Mr Harris puts it, there is no limit to the number of “paper barrels” that can be bought and sold.

That makes it harder for a bubble to develop in oil than in the shares of internet firms, say, or in housing, where the supply of the asset is finite. Ultimately, says David Kirsch of PFC Energy, a consultancy, there is only one type of customer for crude: refineries. If speculators on the futures markets get carried away, pushing prices so high that refineries run at a loss, they will simply shut down, causing the price to fall again. Moreover, speculators do not always assume that prices will rise. As recently as last year, the speculative bears on NYMEX outweighed the bulls.

There is, admittedly, a growing category of inherently bullish investment funds that seek to track commodity-price indices, in which oil is usually the biggest component. Politicians have begun to denounce these “index funds”, since they make money for their investors only if prices rise. According to Mr Lieberman, they have grown in value from $13 billion to $260 billion over the past five years. This surge of investors betting on rising prices, many observers contend, has become a self-fulfilling prophecy, helping to push prices ever higher and thus attract yet more investment.

But Bob Greer, of PIMCO, an asset-management firm, argues that even index funds make unlikely suspects. For one thing, they too invest in futures, rather than in physical supplies of oil. So every month, they must trade contracts that are about to fall due for ones that will not mature for several months. That makes them big sellers of oil for prompt delivery.

What is more, their growth is not as impressive as it first appears. Paul Horsnell of Barclays Capital, an investment bank, puts the total value of index funds and other similar investments at $225 billion. That is less than half the market capitalisation of Exxon Mobil, he points out, and a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year. Although index funds have grown quickly, that growth stems in large part from the rise in value of the futures they hold, rather than from fresh investment flows. He estimates that index funds swelled by $13 billion in the first quarter of this year, for example, of which all but $2 billion derives from the rise in commodity prices.

Back to basics

Mr Harris of the CFTC, for one, believes that the oil price is still a function of supply and demand. For the past few years, the world’s production capacity has grown only sluggishly. Meanwhile, demand, especially from the developing world, has been growing faster. So there is hardly any slack in the system. Only Saudi Arabia and the United Arab Emirates are thought to be able to increase their output from today’s levels, and even then, there are doubts, since Saudi Arabia, in particular, is secretive about the state of its oil industry.

That leaves the oil market at the mercy of even small disruptions to supply. Prices tend to jump each time militants sabotage an oil pipeline in Nigeria, bad weather threatens production in the Gulf of Mexico, or political clouds gather over the Persian Gulf.

The problem is exacerbated by a growing mismatch between the type of oil being produced and the refineries that must process it. The most common benchmark prices, including the one used in this article, refer to “light” crude, the least viscous sort, which produces the most petrol and diesel when refined. “Heavy” oil, by contrast, yields more fuel oil, which is used mainly for heating.

At the moment, diesel is in short supply and there is a glut of fuel oil. That makes processing heavy oil unprofitable for some refineries, since the gains from diesel are outweighed by losses on fuel oil. As refineries turn instead to lighter grades, it pushes their prices yet higher. The discount on heavier crudes has risen to record levels. But even then, points out Ed Morse, of Lehman Brothers, another investment bank, Iran is having trouble selling the stuff. It is storing huge quantities of unsold oil on tankers moored off its coast.

Presumably, Iran and other heavy-oil producers will eventually be obliged to drop prices far enough to make processing the stuff worth refiners’ while. In the longer run, more refineries will invest in the equipment needed to crack more diesel out of heavy oil. Both steps will, in effect, increase the world’s oil supply, and so help to ease prices.

But improving an existing refinery or building a new one is a slow and capital-intensive business. Firms tend to be very conservative in their investments, since refineries have decades-long life-spans, during which prices and profits can fluctuate wildly. It can also be difficult to find a site and obtain the right permits—one of the reasons why no new refineries have been built in America for over 30 years. Worse, new kit is becoming ever more expensive. Cambridge Energy Research Associates (CERA), a consultancy, calculates that capital costs for refineries and petrochemical plants have risen by 76% since 2000.

Much the same applies to the development of new oilfields. CERA reckons that the cost of developing them has risen even faster—by 110%. At the same time, oilmen remain scarred by the rapid expansion of output in the late 1970s, in response to previous spikes in prices, that led to a glut and so to a prolonged slump. Exxon Mobil claims that it still assesses the profitability of potential investments using the same assumptions about the long-term oil price as it did at the beginning of the decade, for fear that prices might tumble again. Environmental concerns are also an obstacle: America, for one, has banned oil production off most of its coastline.

Increasing nationalism on the part of oil-rich countries is adding to the difficulties. Geologists are convinced that there is still a lot of oil to be discovered in the Middle East and the former Soviet Union, but governments in both regions are reluctant to give outsiders access. Elsewhere, the most promising areas for exploration are also the most technically challenging: in deep water, or in the Arctic, or both. Although there have been big recent discoveries in such places, they will take longer to develop, and costs will be higher. The most expensive projects of all involve the extraction of oil from bitumen, shale and even coal, through elaborate processing. The potential for these is more or less unlimited, although analysts put the costs as high as $70 a barrel—more than the oil price this time last year.

Nonetheless, PFC Energy has examined projects that are already under way, and concluded that global oil production will grow by over 3m barrels a day (b/d) over the course of this year and next. In particular, it expects production outside OPEC to grow by about 500,000 b/d both years—a marked increase from the near stagnation of recent years.

Meanwhile, the high price is clearly beginning to crimp demand. The growth in global consumption last year was barely a quarter what it was in 2004 (see chart); this year, it is likely be even lower. In rich countries (or at least among the members of the Organisation for Economic Co-operation and Development (OECD), a rough proxy), the effect is even more pronounced. Consumption has been falling for the past two and a half years.

Poorer countries’ demand for oil is still rising, albeit at a slowing pace. That is partly because their economies are growing faster, and partly because their consumers are shielded from the rising price through subsidies. But the increasing expense of such measures is forcing governments to water them down or scrap them altogether (see article). That, in turn, should further sap consumption.

Oil pique

China’s growing thirst for oil is often put forward as one of the main factors behind today’s higher oil prices. Demand for diesel there, for example, rose by over 9% in the year to April. But Mr Morse argues that such growth might not last. The government has ordered oil firms to increase their stocks of fuel by 50% to be sure there are no embarrassing shortages during the Olympics. It is also planning to run some power plants near Beijing on diesel rather than coal, in an attempt to reduce pollution during the games. These measures are helping to boost China’s demand for diesel, but the effect will be transitory.

In the short run, neither demand for nor supply of oil is very elastic. It takes time for people to replace their old guzzlers with more fuel-efficient cars, or to switch to jobs with shorter commutes, or to move closer to public transport. By the same token, it can take ten years or more to develop an oilfield after its discovery—and that does not include the time firms need to bolster their exploration units.

Gary Becker, an economist at the University of Chicago, has calculated that in the past, over periods of less than five years, oil consumption in the OECD dropped by only 2-9% when the price doubled. Likewise, oil production in countries outside OPEC grew by only 4% every time the price doubled. But over longer periods, consumption dropped by 60% and supply rose by 35%. The precise numbers may be slightly different this time round, but the pattern will be the same.