Slugcatcher: Does George Dubya have the pins to prick the pricing bubble?

Here’s a curious thought: “the world has never run out of minerals”. Fascinating isn’t it, and strangely correct because something mysterious happens every time pressure builds in the supply/demand equation of any commodity – the invisible hand of economics enters the equation and a mis-match is made to fit.

If all this sounds a bit heavy so early in the morning (or late in the afternoon) a quick apology from Slugcatcher who spent part of the week reading up on the current state of the oil price debate.

What caught most of his attention was an analysis of oil in this week’s edition of Forbes magazine out of the U.S. It was in a discussion about the oil price that the editors at Forbes made the point that at some stage in the life of every commodity (and every mine) “it costs too much to produce it profitably”.

Coal in Europe was a case study. Once thought to be in short supply, European coal reserves actually just became too expensive and rather than run out there are now a few billion tonnes of unused European coal.

From coal, Forbes skipped quickly to oil with an argument that essentially said there is no problem with oil reserves, there’s just a problem with oil policies.

Before getting to the suggested solutions, a few critical numbers support the argument that a radical change is needed in western world oil policies.

The first number is 612 billion barrels. Way back in 1971, a year Slugcatcher remembers fondly because it was his third attempt to complete his university studies, that figure was the official (cross my heart and hope to die division) world proven oil reserve.

The second number is 767 billion barrels. This is the amount of oil produced since 1971 – earlybirds can spot the Forbes argument right there. On the 1971 official number we actually ran out of oil five years ago.

The third number is 1028 billion. This the official (cross my heart and hope to die division) world proven oil reserve as at 2004.

What’s happened, of course, is that exploration has been successful, and uneconomic oil has been upgraded to economic via a variety of means.

Forbes reckons that the way to tackle the current oil crisis requires a four-way plan of attack. Improve fuel economy in vehicles and industry. Increase spending on alternative fuels. Redouble energy efficiency, and get serious about solar and wind.

But, the first step, and the one which caught Slugcatcher’s attention, was a suggestion that the U.S. stop pouring oil into the Strategic Petroleum Reserve (SPR) because this one simple move could dramatically drop the oil price.

At last count the SPR held 663 million barrels of oil, and was continuing to grow to a target of 700 million barrels. As well as buying oil for storage at special sites in Texas and Louisiana, the U.S. adds to its reserve by taking delivery of crude in exchange for cash royalty payments.

The point being made by Forbes was that it was the U.S. government itself which was adding to the pressure in the world oil market through its own buying – at a time when it should be selling.

To emphasis the power of a buying halt, and the sale of a few million barrels, a 1991 example was used. That was when the current American president’s father ordered a drawdown of the reserve on the day the first Gulf war started. The impact was spectacular with the price of oil falling from $US32.25 a barrel to $US21.48 in a day.

With the price of fuel shaping as a big election issue in the U.S., it occurs to Slugcatcher that young George might try a similar trick a month or so before the November vote.

It might not be a long-term solution to the future price of oil - that can only be fixed by long-term measures. However, it would be a powerful reminder that the big issue in oil is not the level of reserves (they are determined by the price, not a geological reservoir). It is having the right policies at the right time.