My Never-never Land

I was shock when I saw the gas price listed at Kum & Go drop to $1.75 per gallon yesterday. $1.75, the lowest I have seen since I came to the states. Not surprisingly, crude oil prices already slumped to a level of around $50 per barrel when I went online to check the prices. These ridiculously low prices actually worry me more than delight me. Low oil prices might be beneficial to both industrial and household consumers in the short term, but few realize that from a broader aspect can it be harmful to the future of us all.

Low oil prices keep governments and private sectors from investing in developing environmentally friendly energy, such as biodiesel, clean coal, solar, wind, and so on. We all know that our mother earth is being polluted by the use of oil in generating energy, and we certainly understand the urgency to come up with alternative energy sources that are eco-friendly. In fact, alternatives like wind power, solar energy, and hydroelectricity are nothing new, at least I learned about them when I was at primary school. However, due to physical constraints, like the requisite presence of wind, sunlight, and water, and potential pollutions, such as noise pollution, desertification, etc., they are destined not to be able to be widely implemented. Therefore, other energy sources discovered lately, for example, clean coal and biofuel, are better alternatives. However, they are far from mature to totally substitute oil in global energy market. Scientific studies and experiments backed by governments and energy industry on these sources are essential to bring the technology to mature state. However, governments and companies do not make decision based on environmental effects but benefits. Low oil prices reduce their interests in coming up with new energy sources to take over oil.

Low crude oil prices threaten long-term oil supply. The International Energy Agency (IEA) predicts that demand for oil will rise to 106 million barrels a day in 2030 from 85 millions barrels a day at present. An increase of 21 barrels may not be seen to be a big deal, but there are several problems that undermine the ability of oil-exporting countries to boost their production volumes in the near future. The current oil fields are aging at a rate faster than the industry has expected, which means oil companies have to explore new fields to satisfy the oil thirst in the coming years. The IEA asserts that $26.3 trillion investment needs to be made by 2030 to ensure adequate oil supply, which is more than 1 trillion dollars a year. However, the global economic slowdown has substantially affected the oil prices leading to a sharp decrease in oil companies’ revenues. I fear that projects and capital investments to upgrade existing facilities and/or explore new oil fields planned by oil companies earlier in the year may be postponed or canceled should the oil prices continue to slump. When world economy recovers from the crisis, it is possible that we will see another round of oil prices skyrocketing like what we have witnessed this year.

The global credit crunch has so far led to countries like Iceland and Hungary seeking help from the International Monetary Fund (IMF). The IMF is not a money printing machine; its resources rely heavily on members’ contributions. But, with the financial crisis that widely spread throughout the world, even rich countries unavoidably need to keep their capital to support their own financial systems and economies. The IMF had no choice but to turn to Gulf countries to ask for help. The Gulf countries, which were benefited from the high oil prices earlier this year, have pledged to work together with the IMF and other countries to resolve the economic meltdown. In other words, they are willing to inject their petrodollar into the IMF’s coffers. However, since oil prices have dropped tremendously from the record highs, how much and how long can they assist the IMF? Despite the fact that the G-20 countries have promised to lead the world out of the crisis as quickly as possible, we do not expect to see recovery in anytime soon.  If the financial crisis prolongs or is not curbed, the low oil prices will inevitably reduce the willingness and abilities of the Gulf countries to help the IMF.

I always conceive of the notion that economic growth and political stability are correlated. With that in mind, I believe that oil prices that are at a reasonable level can help bring prosperity to oil-exporting countries and, in turn, ensure stable oil supply to the world market. Petrodollar might seem easy to earn for oil-exporting countries, but not all of them are well-developed. In fact, a lot of them, particular the Gulf countries, are not even close to be considered as developed countries. The boom in energy market earlier this year had given them a great opportunity to improve various aspects of the countries that are concerned to the welfare of the people in the coming years, such as health care, infrastructure, and education. However, with the drastic drop of oil prices, some countries might need to review and/or revise Budgets for 2009 with huge cut in capital spending. Iraq already did so, and it may need to do it one more time as oil prices have plummeted again. Some of these countries have been suffering from social unrest, political struggle, wars, infights, etc. One way to bring peace to the countries is to improve citizens’ lives. If everybody had a job, had three meals a day, got to attend to schools, had access to medical service, or in short, if everybody got to live a decent life, violence could be tamed. This would, to some extent, ensure stable supply of oil to other countries.

At this point everything seems to be intertwined. I think maybe I can put it this way:
financial crisis -> economic slowdown -> plunge in oil demand -> drop in oil prices -> insufficient funds to resolve the crisis; lack of investments in developing alternative energy sources -> threat to future energy supply
Based on the chain above, we can see that it all started with the financial turmoil, but where did it begin in the very first place? Isn’t it the land that I am stepping on right now?

The whole writing seems to suggest that I advocate high oil prices, but no, I don’t. As an owner of a car who drives frequently to work, I definitely hope that the oil prices be kept low, but not as low as what they are now. Low oil prices that are due to economic slowdown do no good to the world economy. I just hope a healthy balance can be struck, i.e. neither too high nor too low. Anyway, little can I do to prevent the prices from slipping further or to drive the prices up. After all I am just an ordinary man.
 

P/S:
1) Again, comments are highly encouraged and welcome ^^
2) I feel like I was at high school writing some stupid English essay. I need a teacher to point out my mistakes in grammar, sentences, and structure xD