The crude oil paradox

Lately there is too much of politics. We must concentrate on economy a and bread and butter issues. So today, i am posting a write up on crude oil.

Crude Oil prices have come to so much that it was almost beyond believing. It was quoted at US $38.01 yesterday.

This is partly because of the decrease in demand as world economy slows and partly because of decreased speculative activities as a result of the drop in demand.

Most people would think it is a good thing to have oil prices that low.

My friends in the oil and gas business told me that the cost of production is in fact about US 60 per barrel, especially for those off shore oil fields.

Another friend who is in investment business told me that the break even point is between 60 to 70 US dollars..

Despite having alternative energy sources such as nuclear power, wind , wind energy, hydro-energy and biofuel, the bulk of the world energy needs are still dependent on oil…

So simple economic logic will dictate that if crude oil is now selling below production cost, will petroleum companies, which are not charity organisation mind you, still continue oil exploration and pour tons of money to develop new fields discovered?

They will most probably not..

Then what will happen?

The present fields will be producing less and less petroleum as time goes on, as petroleum is a depletable substance. When the production falls below a certain limits and less than world demands, oil prices will see another round of increases, only this time, it may go up higher and faster.

This is especially if the world economy starts to recover from the present recession and demands of oil go up.

Remember the last round when petroleum went up to US$140? Malaysian petrol went up suddenly to RM2.70 per litre, and causes  a record inflation in the country. Almost everything skyrockets…..and it really hurts.. The memory of that increase is still fresh.

The lesson from this increase is that when prices go up, they do not come down much even when the crude oil prices have fallen so much.

So if there is another sudden increase in petroleum prices, it will  cause another round of high inflation, and the poor and the middle class will be badly hit. Money in the banks will literally shrink in values.

 While a lot of people think of cheap oil as good, i think it is just economically unsustainable, and that it would be wiser in the long run to have a gradual increase of petroleum prices to level above US60 dollars.

The long term solution is of course turning to new alternative source: wind, solar or water energy, nuclear power and bio-fuel.

Usage of bio-fuel is not without problems.. Increasing usage of bio-fuel encourages farmers to plant business crops rather than food crops, and when that happens food production will drop, at a time when the world population is increasing. This will inevitably lead to higher food prices as we are seeing now; hence usage of bio-fuel will have certain limits.

The solution for this paradox is no doubt beyond Malaysians. Nevertheless, we should, as a nation, look for alternative sources of energy as well as implement certain environmental friendly polices fast.

On a larger scale, perhaps our leaders should play a more active role to  appeal to world leaders to come together to discuss the pressing problems facing Mother Earth, one of them is this depleting source of energy which  is causing the world economy to go topsy turvy.

 Since we all have a stake in this planet, nations must look at the bigger picture , discard any disagreements or differences and come to a common consensus of how to deal with all the environmental problems, including this energy paradox which have contributed to food shortages and increase food prices , global weather changes, inflation and  indirectly the  economic upheavals that the world is witnessing now

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5 Comments (+add yours?)

  1. Kenny
    Feb 16, 2009 @ 14:01:16

    Dr. Hsu,

    I really doubt oil cost US$60 – $70 to produce. Oil only started ramping up last year and before that it was hanging at about US$40 for a long time and keeping oil companies happy at that price. The cost of production couldn’t have changed so much in a year. I have no hard facts to dispute your figures but US$60 – $70 seems highly suspect.

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  3. anon
    Feb 16, 2009 @ 14:38:51

    Dr Hsu

    since you are probably looking at various issues right now that were lurking some years back, the link is one such issue which you may want to have a look…the title of the article is

    *****Catastrophic Fall in 2009 Global Food Production*****

    http://www.marketskeptics.com/2009/02/2009-global-food-catastrophe.html

    Check it out if it something to worry about over the next few months or just a crackpot thing to toss out the window.

    For rice growing countries closer to home, you may want to pay attention to Myammar and Thailand.

    I wish I am a crackpot and wrong about the article.

    Best regards

    Like

  4. Dr Hsu
    Feb 16, 2009 @ 15:20:27

    Kenny,
    perhaps the cost refer to the deep sea exploration.. As land oil starts to be depleted, cost will go up.. And my cource is someone in the oil and gas field, operating a oil and gas company.

    The other is one international investment person who has been featured in Asiaweek before..

    I am not sure about the land exploration cost… but i was told anything below 6o, oil companies would not go for deep sea exploration for new fields…because the easy fields have all been discovered or in production.

    Like

  5. Monk
    Feb 16, 2009 @ 23:48:31

    South Korea is a good example in promoting alternative bio energy and natural resources on energy usage such as solar and wind.

    I have seen numerous documentaries Astro 303 (KBS) on this. Farmers and villages using solar energy for their daily household electrical consumption. From manufacturing to fishermen, creating increasing awareness on the environment.

    Here our locals and business circles are driven by greed and profitability, not to mention the lack of drive from government ministries and a host of problems: causing heavy reliance on polluted resources on energy consumption.

    The only progress made is dirty politiking.

    monk

    Like

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