Are high oil prices a temporary spike, caused by the evil oil cartel? Or are they a reflection of dwindling oil supplies?

I’d like to hear from Lynne Kiesling on this. Meanwhile, here are my hunches.

First of all, I do not believe in the power of cartels to restrict supply. If the Saudis and others are not increasing their oil production, then the most likely explanation is that there is no inexpensive way for them to do so. Randall Parker reminded me of what he wrote earlier this year.

At a February 24 2004 symposium hosted by the Center for Strategic & International Studies energy industry investment banker Matthew W. Simmons presented a skeptical analysis of official Saudi Arabian oil reserve claims. A couple of Saudi Aramco employees argued for Saudi estimates. If Simmons is correct then the biggest oil field in Saudi Arabia may already be mostly depleted and the beginning of the decline of oil production in Saudi Arabia may happen decades sooner than conventional wisdom expects.

The bearish view is that we are consuming oil faster than we are finding new oil, so that the pressure on the price is going to be upward. My instinct is to take that view.

In the long run, Parker and I agree that the price of energy is going to be driven by the cost of oil substitutes, such as nuclear power and solar power. Those costs are coming down over time, thanks to more powerful computers and new developments in materials science. In a recent post on nuclear power, he writes

So let us suppose the reactors would cost $1 billion each. Well, that is only $1 trillion to build 1,000 of them.

Put that $1 trillion in perspective. The US burns about 20 million barrels of oil per day which at $50 per barrel is $1 billion per day or 364 billion per year. Though much of that is not for cars. Still, is that $1 trillion affordable if we really needed to switch to nuclear? The United States has a $11 trillion dollar a year economy. For a cost equalling slightly more than one month’s economic production we could drastically cut our use of fossil fuels. So when people say we have no choice but to use fossil fuels, well, that just isn’t true.

Of course, 1000 nuclear power plants, in a scenario where they are used to produce hydrogen fuel for automobiles, would not reduce our use of oil one bit if the cost of running cars on hydrogen were still higher than running them on oil. But as the price of oil rises, at some point ($100 a barrel? $150 a barrel?) it makes hydrogen power economical.

In some ways, I think that the worst thing that could happen to the energy market in the United States would be another collapse of oil prices. If the price of oil stays above $40 a barrel long enough to convince investors that the change is permanent, then that will stimulate more development of alternative fuel sources.

My picture of the energy market is that prices will rise for several years, but then gradually fall as some research projects start to pay off.

For Discussion. Fifteen years from now, do you think that energy costs will be higher or lower than they are today?