Oil Prices May Drop Soon, But This May Postpone Energy Innovation

There is an article from Larry Kudlow today predicting a drop in oil prices in the near future.  Kudlow's prediction is derived from economic data indicating higher oil supplies in the near future, an increase in exploration and drilling by oil companies, and new legislation favoring drilling.  Given that Kudlow is usually right about most of his near-term economic predictions and points to several factors contributing to the possible drop, rather than just one, this could very well turn out to be accurate. 

However, if prices were to return to lower levels, it is actually not very good for the United States in the long term.  I believe that $70/barrel for oil is the optimal price at which energy innovation can accelerate without tipping the US economy into recession.  Technologies such as ethanol and tar-sand refineries become cost-effective when oil is above $70, but if oil returns to lower prices, this innovation will stagnate once again.

A chart of oil prices (wikipedia) indicates that in the last 120 years, only for a 4-year period from 1977 to 1981 was the real price of oil higher than it is today.  Today's price is higher than it has been for 116 of the last 120 years.  While the 1977-81 price spike caused a painful recession, it fostered significant innovation in engine efficiency and alternative energy.  As oil prices dropped and remained low during the 1980s and 90s, innovation slowed.   Click on the chart to make it bigger. 

   

The US economy will not be able to reduce our dependence on foreign oil, and significanly reduce the pollution of oil consumption, without a multi-year period of oil above $70/barrel.  This will be painful, but is the only way to enable the free market to achieve this necessary goal. 

Related :

$70+/barrel oil, the non-crisis.

The coming jump in energy technology.

Comments

[usnjay]

This may be a partisan view, but lower oil prices may help energy innovation.

Lower prices will help the Republican party in the mid-term elections. The Republican party is in favor of lower taxes and regulation, which means better economic growth. Better economic growth means more wealth and helps technological advancement, which leads to faster innovations.

Slightly partisan, perhaps.
usnjay

[GK]

usnjay,

True. Also note that Bush has increased funding for basic research, which declined during Clinton's time.

But things like Ethanol and tar-sand refineries only become cost-attractive at $70/barrel oil, so if oil is low, these alternatives are not as interesting.

Ethanol is a red herring, a political sop to the farming states and industry.

I agree that some innovation will result in the next few years as smaller more fuel efficient cars hit the market such like what happened after the 1970 Arab fuel embargo. Volkswagen made a penetration of the low end car market followed by the Japanese that totally closed out the US low end competition.

Promising innovations such as plug in electric cars may make a come back (GM dumped its). Innovations from Europe and Japan will probably close out the US competition once again. GM and Ford are in such bad financial shape that I doubt they can mount new programs.

[usnjay]

I agree about ethanol. It sounded good until I did some basic reading on it.

GK, I think the higher oil prices are just as likely to lead to different sources of oil as they are oil alternatives. Higher prices mean more motivation to research getting oil from oil shale and oil sand. We have more oil in shale and sand in North America than all of Saudi Arabia.

Plus, this has the added benefit of using the existing infrastructure.

regards,

[lance sjogren]

I have just begun studying the alternative energy issue but so far what I have read concurs with the posters here who contend that ethanol is not a viable solution. As I understand it, in the U.S., its viability depends on large government subsidies.

I believe (although this is based on very cursory study) that the problem with ethanol is that it is a very energy-intensive process, resulting in little if any net energy pruduced relative to the energy input. (I believe this largely has to do with the distillation portion of the ethanol process.)

Another problem with ethanol appears to be that the amount of farmland required to make ethanol in large quantities is prohibitive.

It appears that ethanol thus suffers from at least two fatal errors.

An alternative approach to producing liquid biofuels is the production of biodiesel on algae farms.

Biodiesel apparently has a much better EROEI (energy returned on energy invested) ratio than ethanol, and algae farms could produce far more fuel per acre than conventional farms, resulting in the amount of land required being modest enough to be viable.

However, my impression is that the development of the processes for such farming is so far in a state of infancy.

[GK]

lance, usnjay,

The key to ethanol (and methanol) is not current technologies of using corn kernels. The key is when things like husks, stalks, grasses, etc. can be used. This would slash the production costs greatly, by using biomatter that is otherwise going to waste AND far more plentiful to begin with.

This requires R&D and risk-taking startup ventures, but those become deprioritized when oil prices are high.

[NewEnglandDevil]

GK - I've read hints that the US gov't has been over-purchasing oil products to account for demand during an Iran crisis. This would also have the effect of raising oil prices generally by projecting demand on the market that wasn't actually there. Could it also be a deliberate manipulation to maintain that $70/brrl. limit?

I believe your position is correct on ethanol. For instance, they would seed large, unused areas like landfills that have a grass ground cover and require quarterly grass cutting - but all that grass would then be harvested.

NED

[chanel outlet]

This requires R&D and risk-taking startup ventures, but those become deprioritized when oil prices are high