Sunday, June 01, 2008

Oil pun here

With oil hitting $130, we're finally seeing people start to accept the reality that oil ain't gonna be cheap, ever again, folks. I was shocked this week as none other than the Wall Street Journal seemed to adopt many of the tenets of the peak oil perspective, for example noting that it's not just oil production that's flatlining: oil exporters are shipping less as their own domestic demand keeps going up. The problem isn't just that the Chinese and Indians are driving more -- the Saudis, Kuwaitis, and Qataris are as well.

Also worth noting is that LNG plants have stalled in America as the price of domestic natural gas has (unexpectedly) stayed low. Cheap natural gas is okay, but it's almost certainly evanscent -- we'll be caught with our pants down when US conventional gas production starts a rapid decline.

Probably most notable of all was the WSJ's story on the International Energy Agency finally admitting that the oil we expect to need simply won't be there. Usually the IEA and US DoE simply predict demand and assume the energy will be there. The IEA at least is finally admitting that we're at least 12 million barrels short by 2015. Oops.

But probably the most thought-provoking thing I've read all week has been Jeff Rubin's CIBC analysis (PDF) which declares that high oil prices have "effectively offset all the trade liberalization efforts of the last three decades." Basically, the cost of shipping a standard container from Shanghai to Los Angeles has more than doubled since 2000 due to fuel costs, and if/when oil gets to $200/barrel, the price will have quintupled relative to 2000. At $200/barrel the effective tariff rate on shipping products to the US is equivalent to rates prevalent before the Kennedy Administration.

This is great news for Canadian and Mexican manufacturers, I suppose, given the cheap transportation to the US. The real question is how high can US demand stay as oil climbs higher and higher -- and why isn't the Ontario government pushing to have more fuel-efficient cars built here?

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