02-05 Prices

Although I spent four years in the oil industry as a young engineer, I still find it almost impossible to fully understand how oil and gas commodities are priced.
There is what is called, a commodities market, where traders can buy and sell “futures contracts”. This is important if you are an airline and want to buy your supply of gasoline well into the future and know what you are going to pay.
Then, of course, there are those that just speculate on the cost of oil and gas, and either make or lose money. They are not really buyers of anything.
But the big issue is the oil cartel called OPEC, which controls about 60% of the world’s oil production. The US, Russia, China and Canada are non-members.
What is so interesting about oil pricing is its complexity and the inability of the public to fully understand what is going on.
Like the rivalry between “Sunni” Muslim Saudi Arabia and “Shiite” Muslim Iran. And the US being Saudi Arabia’s best friend helps keep Iran oil off the world market and oil prices high. Good news for the US and good news for Saudi Arabia.
But regardless of the games going on in the world’s oil markets, we are smart to assume that with the continued growth in demand from China and the third of the world that is industrializing that oil prices will continue to climb.
Today they are in the $65 to $70 US a barrel range and should move up to $80 a barrel over the next five years. What this means is that a lot of sources of non-conventional oil such as offshore drilling, tar sands production and shale fracking are going to be economical.
It was so interesting as a young engineering student to learn about all the commodities that are found in the earth’s crust. Things like fossil fuels, nuclear fuels, gemstones, and minerals. And learning that these things never really run out but increase in price as demand outpaces supply.
So, for example, if we are discussing minerals like platinum, aluminium, iron ore, nickel or copper, when their prices rise new mining technologies and substitutes become viable. It is the same story with oil and gas.
Is this a threat to our way of life? I personally do not think so. Anyone who has travelled to Europe and seen what people pay for gas, you would think they were buying $200 US a barrel for crude. Well with the high taxes levied, the consumer is paying the equivalent of oil at $200 a barrel.
The result is smaller cars, and a massive substitution of fossil fuels with renewables like solar and wind. The next step is going to be the banning of combustion engines, and their replacement with battery driven electric cars. Powered by solar of course.