The War On Oil

The grow consensus is that a replacement for oil must be found rapidly. What unintended side effects will this have?

The United States spends 45 Billion dollars a year on oil (roughly). It it, however, a trillion dollar economy. The US spends 4.5% of its GDP on oil, in other words. By contrast, 98% of the GDP of Saudi Arabia is from exporting oil. Similar figures are recorded against most of the worlds major petroleum producers (though perhaps not quite as extreme). The reason for this is a largely Dutch Disease. It is simply too tempting to spend the money. The oil producing nations are absolutely dependent on oil. We in the West merely find it convenient to buy it.

What will happen when we start to move to non-fossil fuel sources? Carbon taxes/credits will make oil more expensive to us, the consumers. We will begin to switch. At first, the growth in non-fossil fuels will be less than the growth in oil usage - there will be a mild effect on the oil price. As the transition starts to bite, there will be a sudden constriction in the market for oil.

Oil is priced in a strange way. Unlike almost any other commodity in the modern world, it's price is supported by an elaborate cartel. Perhaps only diamonds are so artificially supported. When oil substitutes get to 10% of the market (say - it could be less), the oil price will crash to production prices. Today that would be $25 dollars or so, from a market price of $61.

The effect of this will be suddenly to turn oil from a cash machine to a low/zero margin industry - there will be little or no profit. No more easy billions. OPEC could try to curtail production. But in the face of impoverishment, the oil producing countries will probably cheat.

Nearly all the producers have saved nothing. Many have over spent. The prime exception to this is Norway. The sudden ending of oil profits will send these nations over a cliff. They will not be able to feed their populations, or even give them drinking water in the case of Saudi Arabia. How will they respond?