“Be kind, for everyone you meet is fighting a hard battle” - Often attributed to Plato but likely from Ian McLaren (pseudonym of Reverend John Watson)

Saturday, November 22, 2008

The plunge in oil and gasoline prices

No one can help but have noticed the dramatic fall in prices of fossil fuel and related commodities. Nationwide, regular gasoline is well under $2/gallon. As readers of this blog might imagine, I track the price paid for each tank full, as well as the gasoline cost per mile. I use premium in the Land Rover LR3 HSE and the price for my most recent fill up was $2.459/gallon, down from a high of $4.959/gallon on June 17 of this year.

Does this dramatic drop indicate that concerns about gasoline price and availability are a thing of the past? It does not. These prices are driven by a huge variety of factors, but the number quoted for "oil price" in the news is the nearest month futures price for "light sweet crude" on the New York Mercantile Exchange. There, you can find prices for a huge variety of commodities and a range of contract dates. For example, the closing January, 2009 (the nearest month) price for light sweet crude is $49.93/bbl, whereas the June, 2009 contract closed at $55.05/bbl. There is so-called "open interest" in contracts out as far as December, 2016 which closed most recently at $85.98/bbl.

This last is surprising, given the recent revelations of the International Energy Agency (IEA) report of looming production shortages. The IEA does not have a history of underestimating production capacity, quite the opposite. Yet the price of oil falls.

Already, alternative energy and unconventional (tar sands, etc.) oil projects have been shelved or put on hold because, at current prices, they don't "pencil out." In my opinion, this is ridiculously short sighted. By the time such projects would be completed, the energy produced would surely be profitable. It could be argued that the executives involved know more than I do, and I'm sure they do. But they're constrained by a system that holds them responsible for maximizing results on a quarterly basis so that the price/earnings ratio maximizes share value. Failure to act in precisely that way leaves the company open to shareholder lawsuits.

Such a system makes it nearly impossible to use this incredible opportunity to find rational and sustainable solutions while we can still operate the economy. The opportunity is unlikely to last. So, we've still got the throttle to the floor with the cliff straight ahead.

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