High Oil Prices Encourage New Sources of Energy

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All good things come to an end, and high oil prices are no exception.

The price at the pump, which recently averaged more than $3 a gallon, dropped to $2.84 a gallon last week. Similarly, crude oil hit a low of $69.71 a barrel last Tuesday, down from $75 in June.

What’s up?

Back on April 14, this column suggested that high prices were encouraging new energy sources that will eventually break the back of conventional oil. I noted that Brazil, the largest country in South America with a population of 186 million, is deriving much of its cars’ gasoline from sugar cane. I also noted that so-called oil sands are now processed to produce nonconventional oil, too. And I predicted that oil prices above $50 a barrel will continue to spur a drive to supply world markets with new sources of energy.

It is not too early to say these new trends are solidifying. Like a genie released from a bottle, new investments and new technologies make their own way.

And old technologies once spurned as polluters are making a comeback, as well. Coal and nuclear power are under review, and both generate energy to heat homes, run factories, and light cities much more cheaply than oil.

To be sure, there will be spikes and movements back and forth as new systems settle, but it seems, finally, that a new direction for oil prices is here to stay for the next few years.

There is nothing novel about this. It is called supply and demand.

Between 1973 and 1982, the oil cartel OPEC pushed prices to as high as $60 a barrel from less than $10 a barrel. The strategies for conservation and alternative fuels that followed brought about a steep decline in oil prices — all the way back to less than $10 a barrel by 1999, a steady drop for more than 17 years.

We are there again today, but with a few new paradigms to boot.

• Canada, a firm American ally, is well on its way to becoming one of the world’s largest suppliers of new oil. In Alberta, earth-moving equipment is churning away day and night, scooping up mountains of the country’s estimated reserves of between 1.7 trillion and 2.5 trillion barrels of oil trapped in oil sands, a complex mixture of sand, water, and clay. Once upon a time, it was too expensive to extract this oil, but at $50 a barrel, it is a bargain, and investors, including oil majors and others, are pouring tons of capital into it. For now, that oil is just a trickle, but in a couple of years, the trickle will become a gush, and things may never be the same for oil producers.

• The two most important drivers of high oil prices, China and India, whose relentless demands for energy have pushed prices skyward, are slowing down their consumption of traditional oil because its use has proved unsustainable at $75 a barrel. Instead, both giants are turning to other sources of energy wherever they can — back to coal for China, and maybe back to nuclear for India.

• The chairman of the consulting firm Cambridge Energy Research Associates, Daniel Yergin, says “rivers of oil” are about to come on stream from fields that oil companies have been developing in the past decade, yielding a whopping 15% increase in world supplies. The mere perception of this new oil dampens speculation on prices, which is part of what we are witnessing now.

• The world’s huge developing economies, including Brazil, are moving away from conventional oil. The fact that Brazil has shifted half its automotive fuel consumption to ethanol extracted from sugar cane is already being studied and emulated worldwide, especially in China and India, but also in America, where corn can supply increasing quantities of ethanol.

“The cascade will begin as these new sources of oil come onto the markets in increasing quantities,” I wrote back in April. Now I can add that it has begun.

The New York Sun

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