(Click for updated quote)
For the near term, the positive effects of low oil on the economy cannot be overemphasized; with lower costs of gasoline and heating oil, the American consumer has more money to spend on other things. When looking a little deeper and further out, we may see a slightly different story:
From the Financial Times:
The International Energy Agency, or the developed world’s energy watchdog, warned that cuts and delays in investments prompted by the fall in oil prices and the credit crunch were putting the world ”on a bad path”.
Fatih Birol, the IEA’s chief economist, said: ”We hear almost every day about a project being postponed. This is a major problem.”
The IEA suggested current oil prices are too low to guarantee the necessary investment, noting that the cost of the marginal barrel from Canada’s tar sands was about $80 a barrel, more than $20 higher than today’s oil price.
Basically, there is no incentive for private investment in alternative fuel sources when they would cost $20 more than the “equilibrium” market price of oil. The article goes on to point out that our current oil wells are yielding diminishing returns on output, and the newly discovered fields are very difficult to get to – the Tupi and Jupiter fields outside of Brazil, for example, have been the biggest discoveries in over 40 years. The problem is that they lie 3,000 and 5,000 yards respectively below the surface of the Atlantic Ocean (which as one might imagine, is very costly to drill and retrieve) and will not be economically viable with oil trading at anything below $85-$90 a barrel.
There lies the Catch22; Should this move in oil prices be sustained, can we rely on a new administration, one which used the expansion of alternative energy (one component of “change”) as a key selling point for landing in office, to actually follow through when it won’t make economic sense in the near future? Regardless of the answer, I don’t think it should be a reflection of Obama’s character – A LOT has changed since he started campaigning back in late 2006, and the likelihood of effective legislation comes into greater question when coupled with the fact that the depth and cost of the credit crisis is currently unknown.
Economic Equities 