Monday, January 23, 2006

Oil Scarcity, what's really true

In today's world there seems to be this looming feeling of impending doom as the belief that we will implode under the weight of our own demand for resources grows ever bigger. I've always held the opposite view, seeing oil prices artificially propped up, especially the UK, and more generally Europe and to a smaller extent, the US, by high taxes to try and keep oil usage down, by forcing people to "vote with their pocket books", so to speak, and buy smaller cars, smaller engines, and more costly energy saving features. Looking back to the older generation who always complained that gas was $.25 cents a gallon in my day, and hearing the news that fuel prices have hit record highs, what's the truth in that statement? Well, I've always been skeptical, and haven't really bought into the whole scarcity thing

As Humans, we have an inability to see infinity. We can't see that things will go on forever. I remember an conversation I had with my heavy chassis teacher in Tech school, and I was amazed at the amount of resources that went into making one class 8 truck. I also was reflecting on an article I had read about the same time about resource projections for metals, and how at current production and usage rates we had over 300 years of iron left. The mind boggles to think about the huge amount of metal that exists in the mountains, hills, and mines to furnish the entire world of millions of tons of metal a year for the next 300+ years. My instructor basically said, "why? The resources are there, and they aren't going anywhere, we won't be running out of anything." I doubted him, but if basic economics are true, and history has shown that it is, then he's right.

Which brings me to my current argument. Fuel prices are at an all time high, no one's disputing that. Every time I filled my Firebird with 20 gallons of premium 76 gas, the only fuel it ran cool enough on, I shelled out over 50 bucks. But I began to look deeper, if I can afford to shell out 50 buck at least twice a month, how much of my income was that? The answer startled me, and was backed up by this article, which basically states that oil prices have actually dropped, and it's the oil cartels and other factors that keep it propped up, and artificially so, since it became evident during OPEC I and II that the Saudis need our money more than we need their oil, and they're becoming more desperate to sell it, as increasing competition is making the percentage of oil that we import from them less and less, in short, we are becoming less dependent on them.
As we become more wealthy as a nation, be it UK or US, the percentage of our income that goes to buying essential things like fuel, food, shelter, etc. Actually becomes less, and therefore cheaper for us. Even if the price spikes, it may be a temporary fix to help right sagging energy prices. Looking at the cost of gasoline in the past 50 years, I noticed an interesting issue. If gas costs about $.25 cents a gallon in 1955, how much would it cost in 2005? Using a basic inflation calculator, I plugged in the numbers for that price of fuel currently, and then worked backwards. Using the basic price of $2.18 per gallon in the US in 2005, I came up with guess what? A whopping $.32 a gallon in 1955, a period of relative wealth in the US, being the boom times of post WWII. According to another website, gas cost $.23 a gallon in 1955, which amounts to $1.58 a gallon in 2005. According to the American Enterprise institute, income in 1929 adjusted to 1999 dollars for the average family was $15,745, which, using the trusty inflation calculator, amounts to $2,613 in 1955, and $17,952 in 2005, and in 1929 dollars, $1894. Funny that, considering that is well below today's and 1955's average of average family income. According to Heartbeats, a website devoted to 50's and 60's living, average income was a whopping $1500 more than in 1929, to $4,137. That amounts to $28,422 average family income. Still, well below the current average. According to the US Census, average household income in 2004 was $44,389. Which equates to $6635 in 1955 and $4,219 in 1929. So, as we can see here, our basic income has increased exponentially when compared to 1929 and 1955 values.

What's this got to do with oil? Well, seeing the fuel price in 1955 as $.23 cents a gallon, and the average household earned $4,137, that $.23 is a large percentage of that income. You could buy just under 17,986 gallons of fuel in a year with that price and income. Given today's income at $44,389, and today's record fuel price in 2005 of $2.18 a gallon, that same income could buy you just under 20,361 gallons of fuel, or a difference of 2,375 gallons of fuel difference. This indicates that a smaller portion of our income goes to buying fuel, and this doesn't take into consideration that the cars we buy today are far more fuel efficient than they were 50 years ago. Oil is becoming far cheaper, and the only reason fuel prices are as high as they are is because they are propped up by Oil cartels, and other false methods, such as heavy taxation.
According to the basic laws of supply and demand, prices go down when supply goes up. Even with the burden of heavy taxation and Oil Cartels, oil is becoming cheaper and more plentiful. One could argue that the propping up of the prices by the cartels and taxes are reducing demand and thereby creating more oil availability, but that isn't true. Despite the crushing taxes that are put in place by the various governments we so haphazardly elect, the oil cartels keep their prices up by limiting supply. Looking back simply 7 years ago, we find that oil prices were low, and the cartels were struggling to keep oil prices above $20 a barrel, we were paying approximately $ a gallon for gas. Adjust that to 1955 prices and we see that it is 2 1955 cents lower.

With the rise in the ability for us to extract oil form the ground, more finds in exploration, tar sands, shale oil, etc. We have more oil from more sources than we know what to do with, and being from more locations, less dependent on foreign sources. With a more stable Iraq, which is only 2nd to Saudi Arabia in oil wealth, which, I might add, is estimated with old data, extraction methods, exploration methods, and a former political instability problem, oil will only become cheaper and more abundant. What a wonderful world we live in. Seriously, let's stop living like we need to control everything that has to do with energy, and let the markets do their job. Read the entire article from PNAS, it's worth it.

No comments: