Friday, December 05, 2008

The High Cost Of Low Crude

In you needed more proof that we live in times of dizzying economic change, consider that there is now concern being raised because of low oil prices. Yes, that's right low oil prices are now something to worry about while it was just a few months ago that we were fixated on high oil costs as the price per barrel approached the $150 mark. Today's WSJ has a story on the consequences of oil's slide (sub req):

Already in free fall, the price of oil could soon push much lower as the effects of a global recession take hold.

Crude fell $3.12, or 6.7%, to settle at $43.67 a barrel on the New York Mercantile Exchange on Thursday. Many oil-industry insiders and traders now say prices could slump much lower, into the $30s, before supply cuts push prices back up, perhaps much later into next year. The changes come from a combustible mix of factors -- a rise in inventories, shifts in the quality of oil used by refiners, and severely deteriorating demand.

You don't hear much now from the folks who were complaining last summer when the all powerful oil companies were supposedly colluding to screw the American consumer.

I don't think we're through with the drop. I don't know where it stops, but I don't think we're through," said Steve Chazen, president and chief financial officer of Los Angeles-based Occidental Petroleum Corp.

Lower oil prices are a short-term gain for consumers and businesses, from carpooling parents to households using heating oil to airlines. But a sustained decline in the price of oil also has painful downsides. Energy-driven economies -- in areas from Texas and Alaska to Venezuela and Russia -- can face huge busts, with job losses affecting employment for engineers and roughnecks on rigs as well as the accountants, hotels and restaurants that support them.

Sinking oil prices also reduce the political will to push ahead with costly renewable-energy projects, and reduce the urgency to prioritize energy-policy debates on topics ranging from auto efficiency to offshore drilling. The danger is that when demand does bounce back, prices will boomerang far higher because the supply cushion has shrunk.

While many may take great solace and rejoice at falling oil prices, the reality is that in the long run we're going to be much better off if we prices would stabilize at a level that would support expanded exploration and recovery efforts. The first projects that will get scrapped and the first wells that will get capped are going to happen in places where we want to get more oil from. Places like Texas, North Dakota, and Canada among others.

I heard something earlier this week that the Saudis will be able to continue to extract oil for something like $9 a barrel. If oil prices fall even further, they won't make as much as they have in the past, but they will continue to make money. And, as the story notes, when the global economy does recover and demand for oil does increase, not having these alternative sources online will make prices climb even higher and put more dollars into the Saudi coffers.

Low prices aren't always all that they are cracked up to be.

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