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The Halifax Herald: Fossil fuel costs to grow

Sun. Feb 24 – 4:46 AM

THE WORLD still has plenty of oil. What humanity is running out of is cheap oil.

That fact’s unlikely to change, ever. Which means that historically high costs for crude oil – and, by extension, more expensive prices at the gas pumps – are here to stay.

There will, however, always be fluctuations. The latest, rapid rise in oil prices, up from less than $90 US a barrel in early February to more than $100 US a barrel last week, is a perfect example. What drove the increase? Paradoxically, some of the same fears that temporarily drove prices down.

With data showing the U.S. economy slowing down and, many fear, perhaps even sliding into a recession, U.S. demand for oil was dropping. Hence the retreat of oil prices, from flirting with $100 US a barrel in early January to about $88 earlier this month. Since then, however, investors have begun bidding oil futures up again – fearing that OPEC, at its March 5 meeting, will cut production to protect prices in the face of lower demand.

To be fair, there were other factors, including overreactions to production problems at U.S. refineries and news reports that Nigerian and North Sea production was down. But when new data late in the week showed U.S. crude inventories growing, oil prices fell back below $100.

If this all sounds slightly neurotic, well, it is. Speculators grab news and stampede the market into overbuying or overselling. But, standing back and looking at the big picture, there’s no doubt higher oil prices are firmly entrenched.

World demand for oil is increasing year over year. While North American consumption continues to grow, rapidly rising demand from China, India and other developing countries – a relatively new phenomenon – has enormously sharpened the global appetite for crude. Crude not only fuels economies’ key sectors of transportation and manufacturing, it is a vital component of the production of everything from plastics to fertilizers.

At the same time, world oil production has been steady in recent years. With rising demand and supply stagnant, crude costs were bound to rise.

The fact that production has plateaued, however, doesn’t mean the world is running short of oil supplies. As the price of crude goes up, oil that was previously uneconomical to exploit becomes feasible to extract, whether from tar sands, deep underwater, hundreds of kilometres offshore, or from synthetic sources. But that new oil will, necessarily, be more expensive to consumers.

Although the world’s not running out of oil quite yet, the fossil fuel era, by definition, cannot last forever. As the famed U.S. Shell Oil senior geologist M. King Hubbert said about a half-century ago, the world’s current oil, coal and gas consumption spree – which is but a blip in the long history of mankind – can only happen once. As supplies are depleted and demand keeps increasing, costs will inevitably continue to rise. Cheap oil is now history.

The long-term challenge for humanity – beyond the key economic considerations – is to find alternative energy sources before fossil fuels run out. That won’t be within our lifetimes, but the work must be done now. In the meantime, get used to higher prices.

http://thechronicleherald.ca/Editorial/1039976.html

© 2008 The Halifax Herald Limited

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