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The Oil Bubble

Diogenes

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A very reasonable look at oil prices, and a brilliant idea for solving the temporary shortage problem - The Oil Bubble

Reviewing the history of oil-market boom and bust confirms that we are in the midst of a classic oil bubble and that prices will eventually fall, perhaps dramatically. Despite apocalyptic warnings, the world is not running out of oil and the pumps are not going to run dry in our lifetimes--or ever. What's more, the mechanism that will surely prevent any long-term catastrophic shortages in energy is precisely the free-market incentive to make profits that many politicians in Washington seem to regard as an evil pursuit and wish to short circuit.

The best evidence for an oil bubble comes from the lessons of America's last six energy crises, dating back to the late 19th century, when there was a great scare about the industrial age grinding to a halt because of impending shortages of coal. (Today coal is superabundant, with about 500 years of supply.) Each one of these crises has run almost an identical course.

(snip)

The limits-to-growth crowd has predicted the end of oil since the days when this black gold was first discovered as an energy source in the mid-19th century. In the 1860s the U.S. Geological Survey forecast that there was "little or no chance" that oil would be found in Texas or California. In 1914 the Interior Department forecast that there was only a 10-year supply of oil left; in 1939 it calculated there was only a 13-year supply left, and in 1951 Interior warned that by the mid-1960s the oil wells would certainly run dry. In the 1970s, Jimmy Carter somberly told the nation that "we could use up all of the proven reserves of oil in the entire world by the end of the next decade."

(snip)

If gasoline cost today what it cost a family in 1900 (relative to income), we would be paying not $3 but $10 a gallon at the pump. Or consider that in 1860 oil sold for $4 a barrel, or the equivalent of about $400 a barrel in today's wage-adjusted prices. The first of a continuous series of innovations, in this case the invention of modern drilling techniques in 1869, cut the price by more than 90%--to 35 cents a barrel.

Fifty years ago people would have laughed out loud at the idea of drilling for oil at the bottom of the ocean or getting fuel from sand, both of which were technologically infeasible. The first deep-sea oil rig went on line in 1965 and drilled 500 feet down. Now these rigs drill two miles into the ground--and miraculously, the price of extracting oil from 10,000 feet deep in the sea bed today is approaching the cost of drilling 100 feet down from the richest fields in Texas or Saudi Arabia 40 years ago.

This spectacular pace of technological progress explains why over time the amount of recoverable reserves of oil has increased, not fallen. Between 1980 and 2002 the amount of known global oil reserves increased by 300 billion barrels, according to a survey by British Petroleum. Rather than the oil fields running dry, just the opposite has been happening. In 1970 Saudi Arabia had 88 billion barrels of known oil. Thirty-five years later, nearly 100 billion barrels have been extracted and yet the latest forecast is that there are still 264 billion barrels left--although the Saudis have never allowed independent auditors to verify these numbers.

(snip)

Our point is that the constraints on our ability to find and extract new oil are not geologic or scientific. The real constraints on oil production are barriers created by government. Myron Ebell, an environmental analyst at the Competitive Enterprise Institute, notes that roughly 90% of the oil on the planet rests under government-owned land and these resources are abysmally managed.

(snip)

Here's one simple idea to increase the domestic supply of oil: Have Uncle Sam share its oil-drilling royalties with the California government. If Californians realized they could go a long way to solving their deficit and overtaxation problems by raising billions of these petro-dollars, the aversion on the left coast toward offshore drilling might well begin to subside.
 

Kandahar

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I agree that there is more oil to be found...but the oil supply is NOT infinite or anything close to it. We probably won't ever use up the last barrel of oil on earth, but that's because the laws of economics will have mandated businesses and governments to find more cost-efficient forms of energy long before then.

Oil reserves have increased dramatically in recent years, but that doesn't mean this trend will continue. There is only so much oil in the ground, and the demand is rising higher.

I agree with you about an "oil bubble," but not for the reasons you described. The cost of energy has a long-term history of falling dramatically, and better technology will ensure that this trend continues. But in the short-term, I think it's going to get worse before it gets better. For the next few years, oil production simply cannot meet the rising demands of China, India, and the United States of America.
 

Diogenes

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Kandahar said:
I agree that there is more oil to be found...but the oil supply is NOT infinite or anything close to it. We probably won't ever use up the last barrel of oil on earth, but that's because the laws of economics will have mandated businesses and governments to find more cost-efficient forms of energy long before then.
Agreed on both points, but it will not be the governments who find cost efficiencies - it will be human ingenuity motivated by the prospect of profit.

Oil reserves have increased dramatically in recent years, but that doesn't mean this trend will continue. There is only so much oil in the ground, and the demand is rising higher.
Agreed again, but the doomsayers have an unbroken record for being wrong. If they keep singing the same song they might even prove to be right before the sun goes dark, but there is no need to panic yet.

I agree with you about an "oil bubble," but not for the reasons you described. The cost of energy has a long-term history of falling dramatically, and better technology will ensure that this trend continues. But in the short-term, I think it's going to get worse before it gets better. For the next few years, oil production simply cannot meet the rising demands of China, India, and the United States of America.
The point of the article is that the short term effects are a bubble, and we can take steps to alleviate the pain. What do you think of the idea of royalty sharing with the coastal states? It seems to me that it would be a bonanza for Texas and Lousiana (who already allow offshore drilling), but it would bring a lot more money to the federal treasury if the folks in California and Florida had a chance to share in the revenues which simply aren't there right now. (I might even get enough of a tax cut to redeem the arm and leg I mortgaged for my last trip to the gas station.)
 

Canuck

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All brought on by harlots who said it ,and corrupt people that made a killing off oil prices because of it
 
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