Who's Afraid Of The Big Bad Barrel?
How much is a barrel of crude really worth? Lots, if you believe in the fear factor.
Trucking is on pace to spend a record $85 billion on diesel fuel this year, up $23 billion from last year. That's $23 billion that carriers might otherwise have invested to hire people, add equipment and generally expand operations.
It's hurtful. Hurricane Katrina made it worse, damaging nearly a dozen oil production facilities and helping run the price of crude up to $70 a barrel before it slipped back into the low $60 range in mid-September.
The Bush administration's opening of the Strategic Petroleum Reserve helped; too bad it took Katrina to get that done. As for the outlook, nobody's predicting a return to cheap crude (it sold for around $31 a barrel in 2003).
Forecasts we've seen say it will be over $60 in 2006. Pump prices, averaging $2.41 per gallon this year, are predicted to climb to $2.50 in 2007.
Why do we keep getting smacked with oil price spikes? Is the world running out of oil, as some claim? Not according to Neil Reynolds, a Canadian economic writer. He says it's fear... fear of a supply crisis.
He points to the Canadian Energy Research Institute, which just determined that crude oil itself is worth $30 a barrel, and anything above $30 is the cost of fear of shortage.
If that's the case, in 2003 when crude was $31, we only paid a dollar a barrel for fear. This year, with crude over $60, the price of fear is more like $30 a barrel.
Reynolds says despite what doomsayers believe, a long-term supply crisis is highly unlikely. And based on history, he's probably right. Our past oil crises have not been due to oil shortages. In most cases politics was more to blame. Consider:
• In 1915, the U.S. Bureau of Mines announced that we'd be out of crude oil in 1924.
• Remember the lines at the fuel pumps, and the nationwide trucker blockades in the '70s? Reynolds says it was due to a Richard Nixon oil price control experiment gone bad, not a shortage of oil. When Ronald Reagan removed the controls in 1981, the fear went away and oil prices fell.
• And how about Jimmy Carter's campaign to turn down your thermostats and wear sweaters around the house, because our oil was going to dry up before the 1990s?
In fact, Reynolds says, in 1979-80 the price of crude in today's dollars rose to a whopping $90 a barrel. He adds: "BTU for BTU, oil does twice as much work now as it did in '79-'80." (He's referring to average automobile gas mileage, but trucks have nearly doubled their diesel fuel economy, too).
The bottom line, he says, is that in real dollars, we get so much more work out of today's $65 barrel of oil that it's actually cheaper than it was 25 years ago.
There's some pretty thought-provoking stuff here, but the fact remains that we –<\q>and the rest of the world – are consuming more oil than ever, efficiency notwithstanding. It makes one wonder if the doomsayers are right about a real supply crisis, sooner or later. (There we go; scared again.)
Maybe we should try thinking like Mr. Reynolds. Everyone act like we're not scared anymore and oil prices will come down.
Just think: If we could get the world to be unanimously fearless, it'd be worth 30 bucks a barrel.
Doug Condra
President
E-mail Doug Condra at dcondra@truckinginfo.com, or write PO Box W. Newport Beach, Calif. 92656.
