WSJ must be joking — “Prius Problem: Could Using Less Oil Make Oil More Expensive?”

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"WSJ must be joking — “Prius Problem: Could Using Less Oil Make Oil More Expensive?”"

The WSJ‘s Environmental Capital blog is a must read. But what exactly were they thinking with this column:

So you think you’re being virtuous by trading in the SUV for, say, a Prius? What if, instead, you’re really sticking the next guy in line with higher pump prices?

Yes, the WSJ is revoking the law of supply and demand. Less demand translates into higher pump prices! How is this possible, you ask?

In the debate over why oil prices are so high, and where they’re going from here, there’s an intriguing idea making the rounds: The West’s sudden urge to kick the oil habit may run the risk of making oil even pricier in coming years.

The logic goes like this: Despite all the talk of “peak oil,” big producers in OPEC, and Russia and Mexico could tap 8 million to 10 million barrels per day of new oil — if they got the right market signals. That new supply would be enough to meet the world’s oil demand in the next decade, buying time to gradually shift over to a less oil-intensive economy without the whiplash oil-price volatility of recent months.

What? “If they got the right market signals”?? So, $130 a barrel is not the right market signal??? We’re to believe that OPEC, Russia, and Mexico are withholding oil that could provide them revenues exceeding $1 billion a day at current prices???? I lack sufficient question marks for this post. But it gets better:

The rub, according to this theory, is those market signals. Though oil-consuming nations worry about security of supply, oil-producing nations worry about security of demand. If OPEC and other big producers were sure that expensive, long-term investments in new production capacity would find willing takers, they would pony up to pump the extra oil. But with all the talk in the West about curbing oil demand, the theory goes, oil producers are thinking twice about investing in new capacity.

Yes, “with all the talk in the West about curbing oil demand.” Talk. Talk. Talk. I’m sure that OPEC and Russia are crying all the way to the bank and taking out prescriptions for Xanax worrying about how much people in the West are talking about curbing demand.

The WSJ leans on some Dutch report for this analysis:

This argument is laid out in a recent report from a Dutch energy think tank, the Clingendael International Energy Program. “Asking producing countries to take on the full risk of any possible (but unlikely [Note to Dutch — Duh!!!!!]) over-supply is not fair, and is also not in the long-term interest of the consumer countries,” the report says.

The report argues that oil-consuming nations need to ease oil producers through the transition to a “post-hydrocarbon” economy – not threaten one immediately. Otherwise, the report warns, declining production and increasing demand are going to create a nightmare decade with wild price swings and ever-more expensive oil–and geopolitical tensions between the haves and the wants.

I kid you not. Saudi Arabia, which is in fact already making about $1 billion a day from oil, needs Americans — who will pay some $1 trillion for oil this year — to “ease” them through this obviously painful transition.

So let me get this straight. If we don’t make a transition to a post-hydrocarbon economy, then obviously we are going to keep paying exorbitant prices for oil. But if we do, we are also going to pay exorbitant prices for oil anyway. Wow, we are really screwed. But if so, doesn’t it make a little more sense to reduce our oil consumption sharply, so even when energy prices soar, our energy bills don’t?

Of course, that raises the big question: Is a smooth transition to a less-consumptive society what OPEC and other big producers really want? Or do they want oil at $200 a barrel?

My head has almost exploded.

The really bizarre thing about this article is that the WSJ itself wrote back in October “OPEC’s Lever Loses Its Pull on Oil” (subs. req’d). As I wrote back then, “We cannot be far from $100+ oil.” Duh! Nobody is withholding large amounts of oil from the market (see “Note to media/Bush: Saudis/OPEC don’t control the price of oil any more!“)

The absurdity of this analysis was not lost on the WSJ commenters, one of whom wonders “What if famines in Africa are making wheat more expensive for Americans?”

As for me, I will continue to drive my Prius. If that tiny reduction in demand means my readers have to pay higher and higher prices for gasoline, well, I guess that is just evidence of my selfishness. I should have bought a Hummer.

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11 Responses to WSJ must be joking — “Prius Problem: Could Using Less Oil Make Oil More Expensive?”

  1. caerbannog says:

    Folks here might enjoy this little cartoon: http://www.scaryideas.com/pictures/4714.jpg

    I know that this is off-topic…. but your Hummer dig above
    gave me a good enough excuse to post this.

  2. Ronald says:

    We should shelve any plans for PHEV’s. If some of these came on the market, it’s no telling how high oil prices could go for the rest of it. You’d cause a worldwide panic and depression. Wew, that was close.

    That from the same paper who would tell everybody that reducing tax rates will bring in more money for government, thus tax rates should be zero and then government would have all the money it needed. Just lower tax rates and you’ll get more money. (OK, things are little more complicated than that, it does matter where on the Laffer tax curve you are on and lower taxes can mostly stimulate the economy, but in a Keynesian way, not the Laffer way with lower budget deficits and lower government debt.)

    Now if only I can convince my creditors that if they get less money from me, they get more money overall.

  3. Mark Shapiro says:

    Joe –

    Conservatives have long enjoyed blaming environmentalists for every commodity related woe: loss of coal mining jobs in Appalachia, logging jobs in the west, fishing jobs on the coast, and higher prices for everything. Oh, and 50 million malaria deaths that Rachel Carson supposedly caused (see Deltoid).

    If you think that this WSJ is a head exploder, wait until they start blaming climate scientists for global warming. If you don’t think it could happen, reread your post above.

    Scapegoating is always easier than taking responsibility.

    (Should we start making the point that the deniers/delayers are the Neville Chamberlains of our time, failing to address a clear and present danger? )

  4. Rick C says:

    Looks like Rupert Murdoch has already made editorial changes at the WSJ.

    “The greatest thing to come of this to the world economy, if you could put it that way, would be $20 a barrel for oil,”

    Rupert Murdoch, The Bulletin, an Australian magazine, on February 12, 2003

  5. john says:

    Among the many — many, many, many — flaws in the WSJ piece is this: the notion of an “immediate” or even rapid shift from a oil-based tranportation infrstructure. It takes 5 years to change model platforms, cars stay on the road for about 15- 20. So, even if we started with draconian measures today, the change would only begin to make any serious dents in demand in 25 years here in the US. Even after that time, with $2,500 cars in India and an exploding middle class in China, demand will go up even if they all drove Prius’s.

    Sorry, WSJ, this is just another example of economist/policy wonks choosing the iconoclast role, no matter what reality might say.

  6. Joe Romm says: “[D]oesn’t it make a little more sense to reduce our oil consumption sharply, so even when energy prices soar, our energy bills don’t?”

    A lot more sense, actually. This is one of those rare and wonderful moments when it is particularly obvious that the best environmental policy is also the best economic policy.

    We entered the 1970s with energy being about 5% of GDP and came out with energy costing 10% of GDP; this was a huge contributing factor to the rampant and intractable stagflation that continued well into the 1980s. We entered the current oil price spike with energy accounting for about 2.5% of GDP, and it’s now up to about 5%; it’s a shock to be sure, but only half as big a blow as we took 3 decades ago. If we were to cut in half again the share of our economy that is tied to oil prices, the next price shock could be a minor event—and we might save the planet.

  7. PamFlorida says:

    Maybe the WSJ has a point. In S. FL., we have been under water restrictions for a year. Additionally, we have been bombarded with urgent pleas to conserve electricity. Well, the populace responded, water and electricity consumption declined and all was right with the world, temporarily.
    Apparently, the conservation efforts had unintended consequences. It seems that the water and power utilities are not making enough money, so we now have to pay a surcharge for low water and power useage. In other words, the less you use, the higher your surcharge!
    The consumer will continue to pay through the nose to keep the corporate profits rising.

  8. JM says:

    The is (just barely) a certain grain of truth in the WSJ argument, and we’ve seen it over the course of this year.

    Since about July last year the Gulf states have been stockpiling oil in tankers rather than shipping to market.* The motivation is to hold oil off the market in the expectation of a higher price a few months later.

    So basically the high price signal of $130+ encourages hoarding so supply is limited sending the price higher. Higher prices then release the stock (which I think is what the WSJ is saying), but lower demand only encourages more hoarding as producers try to wait out the consumers.

    The problem with this argument is that eventually the world runs out of oil tankers in which to hoard. If you check the shipping prices on the Baltic Exchange you’ll see a substantial spike in oil price during the latter half of last year continuing through the start of this year.

    In about the first week of May however, the world *did* run out of tankers and the futures price of oil moved from contango to backwardation (it was pretty dramatic, the futures price moved from being about $5 below spot to $10 above during a 2-3 week period)

    So basically the people who argue that the current price of oil is too high due to speculation (hoarding) are probably right. The problem for their argument is that a.) in the long term they are wrong and b.) they are assuming a perfect, friction-free market which doesn’t exist.

    High prices are here to stay.

    * “Why not leave it in the ground?” you ask. Because apparently, in older or degraded oil fields its a case of pump it or lose the field. I don’t know the details but I think it goes like this:- you pump by using the pressure in the field, if you cap the field the pressure is then relieved not through your bore hole but into the “vacant space” once occupied by the oil you pumped years ago. Something like that anyway. So the only way to hoard if your oil fields are old is above ground.

  9. NP says:

    @JM

    Saudi Arabia has not stockpiled oil as such, it is rather that they have not found buyers for their extra supply of oil. That may sound absurd, given the high price, but the problem is that this is heavy sour oil, full of sulfur. Only some refineries can handle this oil, and some can only produce fuel oil, asphalt and bunker oil and other less valuable products, but little or no gasoline. The recent years such oil has been more common, since such oil was often not found economical to produce earlier, but is now. Saudi Arabia could have demanded lower price for this oil, but they probably hoped that buyers would be desperate enough.

  10. Cyril R. says:

    It is very discomforting to see the delusion such as shown here in this WSJ article.

    Lazy/stupid journalists are making things worse. If the people are not educated, how can we expect any democracy to work?

    The energy revolution must also be one of energy education on a large scale.

  11. Jon says:

    This post shows a fundamental disregard for how oil is produced and for the incentive structures governing oil production in export-dependent countries. Regardless of the merits of the rest of the WSJ, this article is dead on: without adequate guarantees of future demand, there is no incentive to increase spare capacity to loosen the market in reserve holders most able to do so. To suggest otherwise – to have your head explode by this logic – is disingenuous at best and irresponsible at worst.

    The most important variable in spare capacity is not what needs to be produced now for technical reasons and then stored aboveground – it is the upstream investment (exploration and production) needed to tap known reserves, of which OPEC holds 55-60% of the global total. You may think a 5 year model transition is plenty of time, but the oil industry deals in decades, not years. This is even more the case for Saudi Arabia and other Gulf states for whom the planning horizon is in generations, not decades. As the Saudis have recently said – although their reasons for doing so are debated – they will cap oil production at 12.5 million barrels per day to save for future generations. How are they saving? Not above ground where storage is expensive, but by simply not investing in producing known fields – of which there are many – now. Indeed, it’s nearly all the Saudis can do to keep replacing the declines from Ghawar and other supergiant fields. This is true in Russia, Mexico and elsewhere.

    This is why incentives are important. It is obvious to any country – any government – that relies on oil money for its survival (think about the UAE, an authoritarian monarchy surrounded by large and hostile countries) that the need for post-oil economics is necessary and that – contrary to early assumptions that it would be driven by supply shortfalls – it will be driven by policies in consumer countries: the US, EU, China and India, chiefly. If the demand will not be there in 10 years, why would you invest even when prices are high in a project that will take five years to materialise and then be expected to produce for another 25 years? In thirty years, there will be significantly reduced demand for your product and prices may not justify the increased costs of investment today.

    And if you succeed in driving prices down now, you simply minimise oil receipts when you should be maximising them to invest in a post-oil economy. This is a major reason why oil markets are so tight and it emerged for a simply historical reason: when OPEC and then the Iranian revolution drove oil prices to record highs in the 70s and 80s, there was a strong demand response. The US boosted automotive fuel efficiency, Europe switched power and heating massively to natural gas. There was also a strong supply response: oil producers (and OPEC members) invested heavily in boosting production to take advantage of high prices. But the combination of a supply glut and demand destruction – coupled with the political collapse of OPEC itself – caused prices to collapse in 1985. They remained abnormally low for twenty years, until today, leaving an era where further investments in spare capacity were a) unneccesary and b) uneconomical. The market was oversupplied and the consuming countries benefited from two decades of cheap imports.

    Now that there is competition for those cheap imports from China and other countries – including in the Middle East itself – the market is tight but there are years of lagging investment to make up for. Even if possible, you have to convince producers that now is the time to boost production. And with high prices already destroying demand, they are very worried of seeing a repeat of the 1980s, where the price plunges and the Middle East devolves into state fragility and regime collapse. Nothing occupies the Saudis more than the threat of high prices once again destroying their market – this time for good. This is why they agreed to a token production increase last month, this is why they’re maximising receipts today and ploughing them into agriculture abroad and economic cities at home.