$100 oil is a good thing? Roll out the barrels

by Stuart Hampton, November 8th, 2007, 6:50 am

I’ll drink to that!

Forbes would have us believe that $100 a barrel oil is a good thing, because it will encourage the development of synthetic oil from coal via a process that was too expensive to commercially develop in a time when crude oil was both abundant and much cheaper. $100 a barrel oil makes synthetic oil produced from coal (such as by Sasol) a profitable alternative and a cleaner way to harness America’s vast and dirty carbon-rich resource. Cheers!

A rising oil price lifts all rigs. In the late 1990s when, partly due to an economic downturn in Asia, demand for oil was less than supply, oil traded for $12-$15 dollars a barrel. During this time you could drive across West Texas (for less than $1.50 a gallon) and see hundreds of idle oil rigs dotting the Permian Basin, seemingly dinosaurs of a bygone oil boom. But they were not the skeletons of a dead industry, merely dormant machines. The oil remained beneath the ground because the cost of operating the rigs for the small amount of oil produced by many of these drilling rigs was prohibitive. But with oil prices moving past $50 and $60 dollars a barrel in the past few months and now heading to $100 a barrel, many of those skeletons have shaken to life and are again producing oil at a profit. Hooray!

$100 a barrel oil encourages not only the small or mature fields with marginal amounts of oil and gas to start pumping again, it also spurs on the producers of unconventional and often difficult oil plays, such as the miners of the vast oil sand deposits of the Western Canadian Sedimentary Basin (such as Syncrude and Suncor Energy), the oil firms that focus on shales and tight sands (such as Aurora Oil & Gas and Vermilion Energy Trust), and the coalbed methane players (such as Quest Resource and Windsor Energy Resources). Splendid!

What else can we toast?

• Higher gas prices might push US automakers to make more efficient engines, to match the CAFE standards of Europe and China. Great!
• $100 oil might have consumers banish gas guzzling SUVs to the luxury market and see the resurgence of smart cars, bicycles, and public transportation. Spiffy!
• $100 oil might push governments and private businesses to invest more heavily in alternative energy development such as wind, solar, and biomass. Happy Days!

The potential hangover?

Lest we get too carried away with our toasts, a sober assessment is needed.

• $100 oil might mean US car drivers paying more than $5 a gallon at the gas pump. Ouch! 
• $100 oil could mean US home owners paying really, really expensive heating oil prices during the winter. Brrrr!
• $100 oil will mean that cruel and despotic regimes the world over that sit on vast oil and gas reserves (such Saudi Arabia, Myanmar, Iran, Russia, and Venezuela) have plenty of money flowing into their coffers, propping up their governments, and making their leaders wealthy. Bummer!

Conclusion:

I’m going to stick with the (drinking) upside. I live in warm Austin, and I walk in my neighborhood. (I’ll leave the tyrants to the State Department). Maybe, just maybe, a sustained period of $100 a barrel oil prices will push us all to be less oil dependent, and more creative and environmentally thoughtful energy consumers. Cheers!