November 24, 2008

Oil and Gas

There's something almost primally satisfying about the merry whistle of steam heat coming up, a feel of moist heat pervading the space. It's sort of like the sauna, only not nearly as hot and a lot more whistly. It's pleasant to come home and say to myself, "Hey, I can afford the $3 to run the heat to warm the house up this evening," and the resulting heat is very pleasant.

See, the thing about living in the Northeast is that it gets cold. NJ is fairly mild by comparison to places like Vermont or Maine, but it's getting down in the 20s this week, and the coldest nights last year were in the teens. So, to one degree or another, you have to have heat, and the computers in the study don't exactly throw off enough heat to warm the house. Now, one of the nice things about living in a multifamily dwelling is that you can mooch heat off the neighbors, but if everyone does that, everyone freezes. So, even if you can get away with not running the heat some of the time, you have to give in and run it occasionally.

Even so, I run the heat as little as I can, as we heat with good old-fashioned fuel oil here in this house, and not only is it not particularly cheap, there's a tendency for it to arrive in truckloads in scary quantities with frightening prices tags. Still, I'm lucky - I didn't prepay an oil contract this past summer, when crude oil was $143 a barrel, so with any reasonable luck I'll be paying much lower prices as the winter wears on. However, fuel oil demand is somewhat inelastic - it doesn't change much with price, because it's a bit of a must-have - and my supplier may well be locked into high-price contracts, bought when it looked like the price would go nowhere but up.

And, truth be told, in the long term, the price of oil will do nothing but go up. We've used up all of the cheap oil, starting in the days when oil was just lying on top of the ground in Pennsylvania (why do you think the motor oil brand is Penn?) and now we're working on the moderately hard to get oil. It's deeper, spread around further, under the North Pole(!) and of course in the wilderness in Alaska. In Canada, they're mining the oil sands, where they basically have to boil oil out of the sand in order to get something usable, and in Colorado they want to tear apart mountains that are made of oil shale, which is porous rocks with oil in the pores. This is not cheap, people.

It gets worse. Right now, demand is dropping because people have finally noticed that we're in a recession - which really started around the beginning of the year - and so the price of oil is headed down. This is nice in the short term - gas in NJ is the cheapest in the country and I just saw $1.799 on a sign - but we'll have to pay for it in the long term if we want to keep using oil. If we need the oil to lubricate our economy, we need to start developing those expensive reserves now, but the problem is that it costs about $70 a barrel to do so. With oil under $50 a barrel, nobody is going to do all of that expensive work. That means that when the recession end and demand comes back, the price is going to shoot up like a skyrocket.

Aside from the problems that will cause for people on a personal basis, that kind of rise in energy prices - since oil substitutes like natural gas will rise along with oil - is going to put a big crimp in recovery. Just as people start feeling a little flush, get a little confident in the economy, here come more record-breaking oil industry profits, gasoline at $5, $6, $10 a gallon, food prices shooting up again. Right now, we have so much structural damage that the oil price spike over the summer just kind of tipped things over the edge. In a year or two, during a modest recovery, a shot of that same medicine could be enough to stop the recovery dead.

Is there a cure? Well, yes and no. Oil prices are going to go up even if we magically make the US independent of oil, because the rest of the world is still highly dependent on oil, and China and India are industrializing and building consumer economies that are using more gasoline. However, we can certainly make it either worse or better with the decisions we make over the next 6-12 months, and I certainly hope that our new President and Congress make the right decisions. We need more sources of energy and we need them soon. As for me, I hope that by the time oil prices head back up, I'm living someplace where I can put in something a little more modern than oil.

Posted by scott at November 24, 2008 08:07 PM