Offloading the risk II: Oil is cheaper than ever

 The Guardian published a report today on possible further cuts to OPEC oil production.

The 2019 oil prices varied from $55 to $75. (1) The 1950 oil prices were about $28. In 2019 dollars, that’s $300. So the 2019 prices are between 1/6 and 1/4 of the 1950 prices.

Verily, “oil is sloshing around” the world (See Offloading the Risk). No wonder ARAMCO is going public. At such low prices their profits must be tanking.

And with such cheap oil, the incentive to convert to renewables is reduced. That’s not good.

(1) See this page on Macrotrends.  Since the latest prices is shown in current dollars, the chart is not adjusted for inflation. The highest price shown is $164.64 in June 2008, or $18 in 1950 dollars, about 65% of the 1950 price.

The cost of externals: An accumulating debt

Steel, concrete, and climate change: the cost of zero-priced externals

New Scientist (November 16-22, 2019) has published an article showing the high carbon cost of making steel and cement, the two raw materials that make our techno-civilisation possible.

The article reports several projects to reduce the carbon cost. One is to use hydrogen instead of coal in blast furnaces. “If the economics work out”, that is. All these projects are priced at the actual costs of development and deployment. This makes them look expensive compared to traditional methods of making steel and cement. (1)

Steel and concrete are a prime example of how traditional economics has misstated the costs of our life style. Neo-liberal (Chicago school) economics prices externals at zero. Thus steel and cement have seemed to be cheap materials for making the things we want. In fact externals do have a price. We just haven’t bothered to work out good methods for pricing them, still less for paying them. (2)

As a species, we have evolved to use our environment as a freely available resource for making what we want, eg, spears. The cost of making these tools was the labour of making them. The cost to the ecosystems was ignored. Our ancestors didn’t notice or care that the tree they destroyed to make sticks for poking game animals to death meant that the ecosystem had to make another tree. As long as humans were a small component of the ecosystems, the long-term effects of our use of natural resources were minimal. (3)

However, the costs of externals accumulate. If we don’t pay them, they become a debt. Mother Nature always collects her debts. We either spend our resources now to mitigate and if possible reverse climate change, or we will pay with the loss of property and life.

(1) Concrete is made by using cement to bind the sand and gravel particles together. This process requires CO2, so some of the CO2 used to make cement is recovered from the air.

(2) Zero-priced externals mean that the goods are under-priced. The market works efficiently if and only if prices express costs accurately relative to each other. Mispriced goods distort the market, which leads to market failure.

(3) Human effects were actually not balanced by ecosystem recovery: archeologists have found evidence that agriculture began the climate warming cycle at least 7,000 years ago. Also, many local or regional extinctions of animals were caused by humans.

Gary Larson. The Far Side Gallery 4 (1993) Another lovely collection of Larson’s cartoons. Two samples below. ****

Creepy Cartoons by Gahan Wilson

Gahan Wilson. Playboy’s Gahan Wilson (1973) Gahan Wilson died a week or so ago: see the New York Times obit. So I took out my copy of this collection, and spent a pleasantly lugubrious hour enjoying his work. I like his mix of the macabre, satirical literalism, and insight into the dark paranoia that terrorised our childhoods. Like cartoonists in general, his work is underrated. Here’s one of the many cartoons that stuck with me. Its riff on the brain-in-a-jar hints at the terrifying truth better than most: The brain needs a body in order to generate the conscious self. The speech of this one is beginning to fracture: The doctors...say...they’ve never... seen...another case...quite...like...it. This brain will not be sane much longer.
    I think that any collection of Wilson’s work is worth more than a cursory look. ****

R. Cobb. Raw Sewage: Unprocessed Cartoons (1970) No longer in print, but worth searching for, this collection reminds us of several things: The Cold War and the threat of nuclear annihilation. The increasing damage caused by our overproduction of material goods. The tight grip that unexamined ideas have on us. The morphing of political principles into religious dogmas. And so on. And while some details of Cobb’s cartoons  fail to foresee the future, the theses are as valid today as they were fifty years ago. Our consumerist capitalism will destroy us. A bleak vision, but a necessary one. ****

Cobb died recently. New York Time obituary here.

David Feldman. When Do Fish Sleep? (1989) Second in Feldman’s series of “imponderables”, which attempt to answer those nagging questions that  our high school classes didn’t cover. Such as the title question. Do fish sleep? Well, they do exhibit episodes of near-zero activity, which I suppose could be seen as sleep. Wrasses cover themselves in a thick blanket of mucus, not to keep warm, but to obliterate their odour, which would attract predators.
     A nicely done potato chip book, with an index, which makes it a useful reference for the times when you can’t be bothered to start up your device and search online. Online searching for fishes’ sleep patterns offers so many hits that deciding which one to open may be more trouble than opening the index in this book and finding the answer on page 161 to 162.
     I like these books (and many others like them, for example the urban legend compendiums), hence ***

Offloading the Risk: ARAMCO goes public

 

Observing when private companies "go public", I've come to what (I think) is an obvious conclusion:

No one sells a business if they expect it to provide risk-free cash for the foreseeable future.

Update 2019 11 15: CBC's The Current a few minutes ago aired a panel discussion about the ARAMCO IPO. One of the panelists pointed out that oil prices are depressed, and likely to remain so. He used the phrase "oil sloshing around".

Another thought (2019 11 22): If we manage to convert to non-fossil fuels in time to prevent our civilisation's collapse, demand for oil will collapse. If our civilisation collapses, demand for oil will collapse (and the  oil-transport infrastructure will cease to function). Either way, there will be no more profit for ARAMCO. On the other hand, Saudi Arabia has a lot of sun-soaked desert, ideal for solar power arrays.
     The only question left to answer is how fast the oil industry will decline to near-zero. That answer is included in the answer to how fast the climate will change, and how fast we can reduce the effects.

Update 2020 03 17: David Olive writing in the Toronto Star points out that oil is a dying business, and that it's past time for Alberta to diversify its economy. About a year and  a half ago, I said much the same thing on Facebook, and was attacked for "hating Alberta." And on this blog, I made the same points as Olive three years ago: https://kirkwood40.blogspot.com/2016/12/pipelines-and-alberta-economy.html

See also my comments on the cost of cleaning up Alberta's oil and gas wells: https://kirkwood40.blogspot.com/2019/04/alberta-and-oil-or-subsidies-forever.html