Wednesday, October 28, 2009

The Narrow Ledge of Oil Prices

Fascinating analysis on the future of oil prices by Chris Nelder at GetRealList:

If these analyses are correct, then we are on what Kopits called “a narrow ledge”: Houston needs $75 oil to keep drilling, but the economy goes into recession with oil at $80.

Two editors of The Oil Drum generally concurred. Nate Hagens put the boundaries a bit wider at $60 to keep drilling and $80-$100 as the economic pain tolerance point, and Gail Tverberg observed that oil at $75-$80 seems to kick off a recession.

If the stability of oil production relies on oil spending staying within roughly 4% and 5% of GDP, it’s going to be dicey. But if the oil price ledge is only $5 wide, then it’s not clear to me whether the global GDP can manage to stay on it.

In short, the world may not be able to continue executing the expensive oil projects of the future at all. The tension between the price of new production and the pain tolerance of the global economy may be resolved not by stable prices, but by a failure to bring new supply online.
This is indeed a crisis—but it’s also a hint that it’s time to focus on how we’re going to replace oil.

Take it from Sadad al-Husseini: “The hidden opportunity may be efficiency and conservation.”

Bottom line: The sooner we can get our plug-ins and electric vehicles out on the road, the more secure our economy will be. 

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