Why are Oil Prices so High? An Energy Primer

10/21/2008 Update:Supply and Demand have now driven prices down significantly, as fears of a global depression, and reduced driving worldwide, have led to decreased use of oil. How significant was speculation in the runup to $147 oil? Certainly it played a part, just as speculation played a part in the dot com boom and the housing bubble. But oil is still up 700% from its lows around the turn of the century, and that’s due to the fundamentals explained further below.

05/22/2008 Update: As this article has become far and away my most-read, and since oil is now cruising towards $140 a barrel, I thought an update was deserved. For those without the time to explore the links below, oil is rising for a simple reason: oil production has not risen significantly since 2005, while demand for oil worldwide continues to rise rapidly. The simple law of supply and demand is moving oil prices up, and no number of Congressional hearings will change that.

With news of crude oil prices topping $110/barrel today, it’s no surprise that the price of gasoline and oil are once again on people’s minds. As an introduction, here are a few links on the global transportation energy (oil) situation today, and on various risks that we might face in the future.

What is Peak Oil? – This Wikipedia article on peak oil outlines the notion that oil production must someday hit a peak, since oil is a finite resource drawn from Earth’s crust.

Export Land Model – Jeffrey Brown, an independent oil geologist, and others at The Oil Drum provide insight into the effects of a simultaneous plateau or drop in oil production coupled with rapidly rising oil consumption in oil exporting countries. The ELM is a simple model that graphically illustrates some of the forces driving energy prices rapidly higher.
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A Slow Motion Health Care Crisis

Diabetes has risen to epidemic levels in the United States, and in certain subgroups diabetics and pre-diabetics (those showing early signs of diabetes) exceed 50% of the population. Diabetes is the fastest growing major disease in the US – a major study conducted by the New York City Dept. of Health showed that 12.5% of all New Yorkers have diabetes, and another 23% are pre-diabetic. More than one in three New Yorkers is likely to get diabetes in their lifetime, and these numbers are similar for the nation as a whole.

Among South Asian peoples, multiple studies have found that more than half of South Asians living in the West either have or are on their way to developing diabetes (roughly 20% have diabetes, and above 30% are pre-diabetic). These rates of incidence are so high that diabetes is perhaps on the verge of becoming normal for South Asians, with non-diabetics being the exceptional case!
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Politics and Race: Obama’s Hurdle

Barack Obama looks ever more likely to take the Democratic nomination for President this year, having won every race since Super Tuesday, and with polls showing him closing the gap with Hillary Clinton in the upcoming races in Ohio and Texas. This raises the question: in a general election, will Americans vote for a black candidate to be the next President of the United States?

Polls done on this topic in recent years have shown that an overwhelming percentage of Americans (94% according to a recent Gallup Poll) are willing to vote for a black candidate. While this sounds encouraging, it is important to look at this number from another perspective. What percentage of Americans are willing to vote for a white, Protestant male? Though polls on this are unavailable, the implicit answer is close to 100%, since every president but JFK (and arguably Thomas Jefferson) has been a white Protestant male, and since almost all Presidential candidates fall into this group.
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GDP Doesn’t Matter, GDP Per Capita Does

It’s 2008, and it looks like the US (and the globe?) may be headed for recession. Even if the economy doesn’t actually enter a recession (defined as two quarters of negative GDP growth), it will enter a period of slower growth during 2008. Just how much will that slower growth affect the US worker and population at large? While GDP measures the size of the total economy, it’s GDP per capita, the slice of GDP that an “average” American has, that really matters. While GDP per capita doesn’t take into account income inequality and other measures that impact individual well-being, it does a much better job of measuring how economic growth is impacting our lives over time.
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US Healthcare – Where does all the money go?

The Census Bureau recently released the results of its 2006 Services Industry Survey, which shed light in particular on where US healthcare dollars are spent:

Census Bureau Press Release: “Doctors and Dentists Account for 27 Percent of $1.6 Trillion in Health Care Revenue”

Full tabular data on US healthcare spending in 2006

The second link provides some detail on where US health care spending goes. It’s worthwhile to note that $117 Billion in Social Assistance is included, with line items like children’s daycare, community housing assistance, and other rolled into the overall Health Care and Social Assistance category. Without Social Assistance, health care spending is actually 1.45 trillion, or 11% of US GDP.
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The World My Son Will Inherit

My son Vishnu was born a bit more than three months ago – and what a wonderful whirlwind it has been! Being a father doesn’t leave much time for introspection, but now that I find myself thinking further into the future, I wonder: what sort of world are we leaving our children? The usual laments can be heard throughout mainstream media, that we are running up an insurmountable debt to be born by our children, that Medicare and Social Security are both going bankrupt, that global warming will wreak havoc, and so on. While it’s obvious that the media tends toward hyperbole to draw an audience, some of these are real concerns. Here’s my short list of major American and global issues, and why I’m an optimist with regard to most:
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What happens to expiring milk?

What happens to perishable products (particularly milk) when it hits its expiration date at a grocery store? Do they just throw it out, or do they do find a more worthwhile use for it? This article implies that some expired foods have an afterlife, but I’ve read or heard elsewhere that expired milk is simply thrown out.

Why not buy milk from grocery stores on the morning of its expiration date, and sell it to restaurants, bakeries, and hotels that use large volumes of milk? Since these institutions use large volumes, they could use their daily supply up every day, thus ensuring no spoilage issues. If you could buy expiring milk for 50% off wholesale, and sell it for 75% of normal price, the margins are obvious.

Does anyone already do this? It seems like a simple, environmentally sound business idea. Maybe the logistics costs of gathering just a few gallons at each grocery store make this unworkable. Still, it seems like a reasonable idea… anyone know if this is already done, or why it wouldn’t work?

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A Quiet Louisiana Success Story

Louisiana is not generally known for its success in economic development terms, and post-Katrina the nation’s view of Louisiana as corruption-ridden and inefficient has (justifiably) grown considerably worse. Update: I hope Bobby Jindal’s election represents a turning of the page in this regard!

I thought I’d highlight an area of economic development success for Louisiana government and for the current governor’s administration in particular. Kathleen Blanco appointed Johnny Bradberry, a former energy company executive, as head of the Louisiana Department of Transportation at the beginning of 2004. Bradberry has done an excellent job at the La. DOTD, and has specifically driven forward the TIMED program, which is responsible for widening key highways throughout Louisiana from two to four lanes.
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Arctic Sea Ice Gone by 2013?

Summertime Arctic sea ice is indeed vanishing faster than anyone previously predicted, as this graph makes clear. The National Snow and Ice Data Center at UC Boulder concurs, and there is no disputing that 2007 was a record year for Arctic sea ice melt. That doesn’t bode well for future temperature rises, since the ice acts as a giant sun reflector, and helps cool the oceans.

But hey, looking at the bright side, at least the fabled Northwest passage is now open in summertime!

Arctic Sea Ice Trends 1979-2007

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Peak Oil – I can’t wait!

What is Peak Oil, and why am I so excited about it? Peak Oil theory owes its start predominantly to the work of M. King Hubbert, who correctly predicted in 1956 that US oil production would peak in the early 70’s. Hubbert was a research geologist for Shell, and in his research noted a bell curve distribution in the rate of discoveries of new oil fields. He predicted that the later exploitation of these fields would follow a similar curve, wherein oil production would reach a peak rate at some point in time followed by a steady decline. While highly controversial, Hubbert’s theories proved correct in his own lifetime, and have spawned a generation of Peak Oil theorists who are predicting an imminent peak in world oil production.
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