Last week was a bad week for fossil fuels in Sweden. The well-known Professor Jeffrey Sachs, boss of the influential Earth Institute and professor of economics at Columbia University, was in Stockholm, and he apparently declared that not only oil but also the other fossil fuels will soon be on their way out. Kaput! Luckily, unlike many of his admirers in Stockholm and New York, he did not add nuclear to that list, because if he had he might have been compelled to accept a string of highly paid speaking engagements and simultaneous guest professorships in this country before being allowed to tender his final farewells.
Compelled how? Compelled by a threat to remove his name from the Nobel short list if it happens to be there.
Unfortunately, his hosts did not bother to solicit his opinion about the strange behaviour of the richer countries in OPEC, who together with the unenthusiastic cooperation of their less fortunate colleagues recently informed the oil importing countries that in the future they will turn the setting of the oil price over to the market.
That sounds beautiful to some ears – perhaps like something you could have heard in economics 101 or 201 lectures at the University of Chicago when Professor Milton Friedman was strutting his stuff, which included claiming that OPEC was a lost cause, and the oil price was on its way to five dollars a barrel. Accordingly, this is the place to declare that the movers and shakers in OPEC have no intention of allowing the market to determine anything important about the oil in their countries, and eventually this might also be true about natural gas. Why should they? Would you if you were in their place?
When the oil price touched $147/b in 2008, OPEC supported the myth that it was speculation (i.e. gambling) and not fundamentals (i.e. supply and demand) that was the villain. That absurd allegation suited the fancy of a finance professional named Michael Masters, who appeared before a sub-committee of the United States Congress, and assured those ladies and gentlemen that it was speculation and not buying and selling on the physical oil market that was ruining the lives of American motorists. The Fox News star, Mr Bill O’Reilly, also took a part in this discussion, informing his many admirers that it was ‘little guys in or of the Las Vegas genre’ who created the problem.
If you don’t believe anything else in this note, please believe that neither Mr O’Reilly nor Mr Masters nor the persons they broke bread with during that dramatic period had any accurate knowledge about the functioning of the world oil market. The aforementioned price – $147/b – was due to the demand for physical oil outrunning the supply, and was sufficient to initiate the most severe economic and financial meltdown since the great depression. Moreover, while it was not clear to many observers, it was clear to me that if the oil price villains had been in Las Vegas, or the financial district of New York, President Bush could have taken the morning train or a Greyhound Bus to Wall Street, or jetted to Las Vegas, and using the very great powers of his office, put things right before lunch was served.
Instead he climbed into Air Force One and flew to Saudi Arabia, where he asked the Saudi King to produce more oil, and preferably sooner rather than later. That ‘hat-in-hand’ episode was concluded very shortly after the delivery of the president’s request, with King Abdullah thanking him for his concern, and wishing him a safe trip home.
The oil price soon began to decline, but unfortunately this failed to restore the health of the international macro-economy. Some non-thinkers and self-appointed experts said that it was headed for five or ten dollars a barrel, but in reality it was headed for $32/b, at which point OPEC calmly stepped in with a substantial reduction in output, and the oil price began to climb again. It paused just over $70/b and then proceeded to around $100/b, which was sufficient to provide OPEC with an income of almost a trillion dollars a year. IT WAS THIS BEHAVIOR THAT SHOWED THE POWER OF OPEC, and that power still exists. It exists and for that reason the decision to commence the export of (light) American oil – although the U.S. is still an importer of oil and natural gas – does not make the slightest economic sense.
Earlier, output in the U.S. peaked at the end of l970 at the level of about 9.5 mb/d – which is approximately the present output of Saudi Arabia and Russia (and the U.S.). When that peaking took place there was still an enormous amount of oil in the United States, or directly offshore, but even so production dropped to 7.5 mb/d! When the giant Prudhoe Bay field in Alaska came on line, the total output in the U.S. turned up, but unfortunately the previous peak was not attained, and eventually production began to decline again. Fortunately though, shale oil entered the picture, and now U.S. oil production is in the same category as that of Saudi Arabia and Russia.
The question then becomes, what will happen to U.S. oil production in the future? After examining the statistics for reserves, reading about the rapid depreciation/decline of shale deposits, observing and hearing about the ‘flattening’ of some shale production curves, I have decided to believe that the U.S. shale ‘boom/revolution’ is in danger of running out of steam. Global oil production and consumption is another matter.
Conclusion: A Statement About The Other Matter
As alluded to in the first paragraph of this note, Professor Sachs did not provide his hosts with a nuclear-friendly message before leaving Sweden (although there might be one when or if he makes an appearance at the forthcoming climate talkathon in Paris later this year.) But an explicit message just now is unnecessary, because GOOGLE will tell you he believes that nuclear is the only way that the (alleged) climate menace can be efficiently dealt with. I have also informed friends and neighbours that nuclear is necessary, but made it clear that an important change in attitude is necessary on the part of the decision makers if we are to have these assets by the time they are needed! This topic is crucial, because Professor Sachs also reminded his hosts of an important fact that they and their political masters prefer to forget or not believe, which is that the global population is increasing by about 750 million persons per decade.
If you can accept the above remarks, and are capable of putting them together in a logical manner, then even if you ignore the widespread hostility to nuclear and assuming that ceteris paribus the rate of construction of reactors could be doubled, tripled or even quadrupled, the bottom line is that you – like me – cannot avoid concluding Professor Sachs or anybody else is almost certainly grossly incorrect if they believe that fossil fuels can or will be dismissed during or even somewhat after the time frame considered/discussed by Professor Sachs during his visit to lovely Stockholm.
Refferences
Banks, Ferdinand E. (2015). Energy Economics: A Modern First Course. (In process.) (2015).
Energy and Economic Theory. London and Singapore: World Scientific
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