Why Cheap Oil Won't Change Anything

Even if your Thanksgiving gathering had its share of sour family moments, consider yourself lucky: You weren’t stuck with a bunch of OPEC ministers in Cairo, where they couldn’t even agree on whether to cut oil production further.

Even though oil recently dropped below $50 a barrel for the first time in more than two years, OPEC is punting on a decision to reduce supplies. But as relieved as people still driving gas guzzlers might be, there are reasons why gas below $2 a gallon might not be welcome at all.

In addition to the obvious effects on the climate and depressed sales of hybrid and electric cars, cheap oil can also hurt the future oil supplies OPEC is dithering over today. Research firm CapGemini issued a provocative report last week calling cheap oil “very bad news” for those supplies. Among its findings:

  • A big drop in oil price will render expensive projects no longer viable, financially. Ninety dollars per barrel is about the threshold below which production from the extra heavy oil sand in Canada would not give a satisfactory return on investment. At the same time, this heavy oil is needed for the future, and investment needs to start now.
  • Even if Western countries’ economies slow down or even go into recession, pushing down their oil consumption, it will not be enough to offset the steady consumption growth in the developing world.
  • Technical difficulties in replacing current oil production with new discoveries will remain.

All of this provides even more reasons to continue the push for oil alternatives now. A reprieve from high oil prices because of weak demand is just that — a temporary reprieve. Once energy demand does recover around the world, the supply may not be there and oil prices could spike toward old highs rather quickly. And the unpleasant old side effects — global conflicts, oil dictatorships, calls for offshore drilling — would also come back just as fast.

Pushing toward feasible alternatives to oil next year, however little appeal they may offer in the short term, will make a transition to a recovery that much smoother.

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