by Jurgen Brauer, April 2004
Copyright: J. Brauer. No reproduction without permission.

I must be mad. Hurray for high oil prices?

I must be mad. Hurray for high oil prices? Sure thing. During the 1991 Persian Gulf war - when people talked about $100/barrel oil - I argued publicly that this could never happen for the simply reason that at about $40/barrel, alternative energy would become commercially viable. Sure enough - the oil price scratched $40 just once, and then dropped back.

During the 2003 Iraqi war, oil prices spiked to $40 very briefly as well. Then they dropped.

Over the course of the year since the Iraq war started, oil prices have gradually pushed upward - now to about $35/barrel. The main reasons are a recovering, energy-hungry economy in the United States, and a world economy - especially China - that is adding to oil demand. The northern hemisphere spring and summer driving season is upon us, pushing gasoline and hence oil demand. Refinery capacity is low, causing strains on the supply side. And the restatement of Shell's "proven" reserves has spooked the energy markets. (Shell apparently has many fewer "proven" reserves than they had let on - another accounting scandal.)

As a result, investors and oil users are increasingly looking toward other energy sources. Not surprisingly, coal and natural gas prices have increased smartly as well. Coal went from about $34/ton in early 2003 to nearly $50/ton now, and natural gas from about $4.50/btu to round about $5.50/btu.

Alternatives such as reusing old oil wells are profitable so long as crude oil prices stay above $25/barrel. More disputed is what the oil price will have to be to make oil derived from oil-shale sands in the Canadian province of Alberta commercially viable. Some say $20/barrel. An article in the New York Times from January 2001 cites a source as low as $9/barrel. Consequently, a number of energy companies are investing very large amounts of money in the technology needed to make the project work.

It is not enough merely to extract oil from other sources or to reinvent nuclear power. We must factor in the full cost - the production cost, the distribution cost, and the cost of consumption or what is known as "full-cost accounting."

Of course, high oil prices have brought nuclear power back into the discussion, if only we could really solve the disposal problem. And therein lies the real problem and the real news. It is not enough merely to extract oil from other sources or to reinvent nuclear power. We must factor in the full cost - the production cost, the distribution cost, and the cost of consumption or what is known as "full-cost accounting." This would include stranded or abandoned energy plants, costs of oil spills, pollution and climate effects, the costs of traffic jams, and many more. If energy users actually directly paid those costs, the oil-equivalent price per barrel would already be at $60 or more. Clean, alternative energy, not just alternative energy, would already be a reality.

High current oil and gasoline prices will do us good as they remind us that already we are fooling ourselves by under-pricing energy in not fully accounting for its cost and in reminding us to renew the search for clean, alternative energy sources. If only the various US government administrations and Congress could get their act together and help to properly fund the (re)search effort, we might finally make substantial headway on this score.