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News and analysis on the global poultry
and animal feed industries.
on June 24, 2009

The future price of energy

Not only do high energy prices affect operating and transportation costs, but the price of corn is now linked to the price of oil due to the massive use of corn to produce ethanol.

The cost of energy is vitally important to the poultry industry. As a result, grain users like the poultry industry need to keep an eye on oil prices. It has not been a pretty sight. In just two years, the price of crude oil has doubled.

High oil prices have stimulated a lot of talk about whether the earth is running out of oil. Experts tend to be divided into two camps. One camp says there is plenty of oil and the recent high prices are just a temporary spike caused by rising demand, the falling dollar and speculation. The other camp says the earth is running out of easily obtainable oil and high prices are the natural reaction to this scarcity.

Is it possible that both sides are correct? In the short run, prices are bound to fall as high prices stimulate increased production and reduce demand. Nevertheless, in the long run, the earth may indeed run short of this vital commodity. Most agree that at some point in the future, the total production of oil will peak and a long decline will begin. The disagreement is not if, but rather when, peak oil will arrive. Is peak oil next year or 30 years from now?

In 2010, the world will be pumping 90 million barrels of crude oil per day. Back in 1980, during the last oil crisis, the world was producing 65 million barrels per day and managed to increase production by 25 million barrels over the next 30 years. Can, and more importantly should, the world increase the supply of crude oil by 25 million barrels in the next 30 years?

The world may well be able to produce 25 million additional barrels per day but it will be more difficult this time. At higher production levels, an increasing number of new wells are needed to replace the natural decline in individual oil well production. As a result, an increase in supply of 25 million barrels in the next 30 years will require 100 million barrels of new production compared to only 70 million barrels of new production needed from 1980 to 2010.

Saudi Arabia produces 10 million barrels of oil per day. The next 25 million barrels of oil of world production will require a new Saudi Arabia every three years for 30 years. That accomplishment may well be possible, at a price, but is it wise?

Leaving aside the question of global warming, it should be evident to everyone that there is a danger in being dependent on an exhaustible resource at an ever-increasing rate even if it is possible to do so temporarily. It may be prudent to consider leaving some of that oil in the ground and turn increasingly to renewable sources of energy. We do not want to be like the people on Easter Island whose civilization crashed after the last tree on the island was cut down.

Oil price prediction

Although predicting the price of oil is a risky business, the laws of supply and demand and the reality of limited oil suggest the following scenario:

  • Short term/Lower prices The oil bears are correct.
  • Long term/Higher prices The oil bulls are correct.
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