How the High Price of Oil Defeats Itself

Being held hostage by high prices for things we can’t live without seems to be an ever common state of affairs. Need to get to and from work? Unless you’re lucky enough to live in an area where buses, trains, bicycles, or your own feet can do the trick, you’re likely dependent on a vehicle of your own that runs on fossil fuels. When the price of gas goes up, you can scarcely do more than grumble about the high price of oil and pay whatever it happens to cost — what choice do you have? And the higher price of oil drives up the prices of other goods and services; the overhead of increased cost to do business must be covered, and that’s an expense that’s passed along to the consumer.

How High Price of Oil Defeats ItselfWhen is enough enough? In May, Saudi Prince Alwaleed bin Talal (the 26th wealthiest person in the world, according to Forbes Magazine) said in an interview: “We don’t want the West to go and find alternatives. The higher the price of oil goes, the more they have incentives to go and find alternatives.” He believes that keeping the price of oil at around $70-$80 a barrel will keep oil consumers (just about everyone on the planet) happy enough to stay put with the current sources of energy that rake in big profits for the petroleum industry.

University of Alberta researcher Andrew Leach says: “From an oil company’s perspective or an oil state’s perspective, they’re not going to sit back and price themselves out of the market. A lot of models that look at alternative energy deployment are quite dependent on this continued increase in oil price. If you just put that in your model, you’re ignoring the story that says that, if oil is irrelevant in 30 years, then there’s going to be a lot of incentive to get it out of the ground today.”

So raising oil prices is bad for big petroleum and good for alternative energy industries for two reasons. First, it motivates disgusted consumers toward exploring alternative forms of energy out of spite. Second, as the gap between the price of currently expensive alternative energy sources and relatively inexpensive petroleum shrinks to the point where they cost the same, there’s simply no reason to fork over good money to an obsolete industry that pollutes everything it touches. If it costs the same to power your house on locally produced hybrid solar and hydrogen power as it does to buy electricity generated from petroleum that came from halfway across the world, which would you choose?

As Leach explains: “Right now they don’t have to eat any oil-price increase because they know that whatever price gets posted on the sign, people grumble and complain and pay. If, in Edmonton, when gas prices went above $1.20 per litre — and suddenly 50 percent of the market dropped out of the gasoline market, you could expect refiner margins, retail margins, everything, to go through the floor. The retailers would know that, ‘if I increase my margin by $.10, I’m going to lose 50 percent of my customers because they’re all going to be on the LRT, on their bikes or they’re going to be walking.’ Even in the short term, it’s going to force the producers to eat that world oil price increase.”

CC licensed Flickr photo above by ┬░Florian.