09.25.2006
The Potential Collapse of Oil Prices Makes Restraint of Gasoline Consumption Key to Controlling CO2 Emissions
Raymond J. Learsy
Huffington Post
We are all becoming well aware of the dangers of an impending and catastrophic climate crisis. The State of California, only recently with bipartisan cooperation, passed laws committing to sharp reductions CO2 emissions. So too have some 295 American cities. Al Gore has warned that we are near the tipping point of climatic catastrophe.
The "Scientific American" has published a prominently featured article recently, whose lead sentence is "The debate on global warming is over." There is a growing consensus throughout the land that emergency solutions are needed. That we owe forceful action now to the planet, and to future generations.
Yet there is rarely a balanced discussion on the issue of automobile fossil fuel emissions, perhaps the most serious CO2 contaminant extant. Yes, there are a plethora of solutions put forward from downsizing our cars, to switching to bio-fuels, hydrogen powered engines, electric powered and hybrid vehicles, and on. All of which will take time, years perhaps, before they have a serious impact. But never or at least rarely ever, has there been a serious discussion on curtailing the availability of gasoline and thereby moderating our driving habits almost overnight. Why is this issue taboo? We did it during World War II, successfully, and with a great sense of shared purpose.
The issue of constricting gasoline consumption is now becoming urgent. We are all well aware that gasoline consumption has been somewhat curtailed by the recent high price of gasoline. Crude oil is the largest component by far, in the construct of gasoline prices. And the price of crude oil has been falling sharply.
In the last four weeks the price of crude oil has fallen some $18/barrel from over $78/bbl to just shy of $60/bbl, its steepest dollar decline in fifteen years. The price of gasoline has inched down correspondingly. Lower prices of gasoline clearly encourage greater consumption, and in turn result in greater CO2 emissions.
Consider the following. When natural gas prices were escalating we were forever advised
that crude oil's price increases were simply keeping in tandem with the direction of natural gas
prices. Yes, they are different markets, but that they are fundamentally energy components, made the argument persuasive.
Last December the price of natural gas touched an all time high of $15.78 per million British Thermal Units. Last Friday the closing price for natural gas was under $5.00 per mBtu. This represents a retracement in price of over two thirds from last December's highs. An equivalent percentage drop in crude oil prices would bring the price of crude to $26/bbl, not far from where they were over three years ago.
Will the price of oil drop in the same magnitude as it has for natural gas. I do not know. Certainly the fallout from the Amaranth and MotherRock Hedge Fund implosions forced significant selling in natural gas on the commodity markets. As regards oil, who knows whether there are not similar positions that yet need to be liquidated. Or whether there are hedge funds out there who played the contango card (betting that prices will be significantly higher in the future- an enormously successful trade over the past few years) having purchased physical spot crude oil at prevailing prices and storing the oil in the hope of cashing in on the contango premium. Instead they may now be faced with the prospect of being forced to sell in a steeply declining market.
And then there are other anecdotal issues. China in past months has been importing less oil on a monthly basis than a year ago. OPEC, with a production quota of 28 million barrel/ day is shipping on average some 500,000 barrels/day less, not out of cleverness but simply because there are no takers. Distillate stocks, which include heating oil and diesel, are at their highest levels in seven years (when the price of oil was around $20 barrel). Gasoline supplies are 6.4 percent higher than a year ago. Crude oil inventories are in their upper range for this time of the year and well ahead of their five year average. And the economy appears to be slowing.
We have been so brainwashed that the above scenarios had become virtually unthinkable. I still remember late last year, and in January, CNBC trotting out industry analyst after industry analyst predicting $20 per mBtu gas or higher by end of last winter (by the way, where are the post mortems to those predictions). The conditioning by the media, the oil companies, the oil industry associations and their PR campaigns, by OPEC propagandists and their disinformation, by the peak oil cheerleaders, has been such that the thought of a major retrenchment in the price of oil has been practically expunged from our dialogue.
Will oil prices go the way of natural gas? Again I say I don't know. Certainly OPEC will do all it can to impede a significant erosion of prices. Whether they can hold the line in a well supplied market remains to be seen. But the important thing here is that it may happen, and with it a steep decline in the price of gasoline as well as the price of distillates. All of which is not bad except as it impacts our consumption of these products. Low prices will encourage greater consumption of fossil fuels and a laxness in the impetus and steps we are beginning to take to wean ourselves away from our addiction to oil.
To protect our environment, for reasons of national security, for reasons of economic rationality and self reliance we need to kick our addiction to fossil fuels for once and for all, whether the price of oil is high or low. And much better that the price be as low as possible, especially as regards our national security and our economic well being.
High prices for crude oil are in the interests of the oil companies, their hangers on and the national producers, i.e. OPEC and its adherents such as Saudi Arabia, Iran, Venezuela among others.
But we need to prepare for low prices and for that reason we need to have a plan in place to cap
our consumption of gasoline and to bring it ever lower as alternative fuels and solutions take hold. In my Post "Breaking Oil's Price, Curtailing Gas Consumption, Regaining our Self Respect" 08/14/06, I had proposed a voucher program which I felt was fairer than a gas tax. Perhaps we need an emissions tax. Perhaps a straight rationing program, perhaps a combination of all these and others. But most of all we need leadership!
A very personal opinion. The only one I see out there who has enough passion and commitment on this issue, and who appears willing to take on the vested interests both in government and industry to truly effect change is Al Gore. Now the big question. Does he care enough to put himself on the line to achieve high office where together with the bully pulpit and the political clout inherent in the Presidency he could actually take in hand our addled dependency and lead us out of our increasingly ominous wilderness?
