Drilling Down on Higher Oil Prices

There is already some oil scarcity, current prices being several times what they were just a few years ago, but a great deal more lies before us. While we wait for the future to unfold let’s visualize what real oil scarcity will look like.

So far scarcity is causing poor people and poor countries to be priced out of the market when a portion of their usual oil purchases go to a richer country that is willing to bid more. There are now on the Energy Investment Strategies website a growing list of news articles about developing countries which are experiencing energy shortages, some of which are at least partly caused by insufficient oil supplies.

A perfect analogy for the oil market is the market for residential real estate. Today’s energy shortages in some developing countries are like gentrification in real estate, the process of upwardly mobile "pioneers" buying cheap, run-down houses in good locations and dis!
placing the former poor residents from their homes.  Americans, Europeans and other wealthy countries get the oil they want but a town in Kenya runs out of gas. Or a hospital in Nairobe must close for all but a few hours a day for lack of diesel fuel to power their alternate electricity generator.

The future of oil will look more like another real estate phenomenon: the life and death struggle for the best apartments in Manhattan or the best ocean front properties in The Hamptons or Santa Barbara. This auction is limited to the rich and powerful. $110 million for one waterfront acre in Palm Beach? Hey, no problem for the people bidding on this deal - it’s chump change to them.

In exactly the same way, competition for oil will some day be waged among first world countries and the wealthier players in growing countries. Between the U.S., the E.U., China and India. Each will be crying out higher and higher bid prices to tempt Russia or Saudi Arabia to part with more of their oil, their patrimony. In that contest, $75 oil will be seen as a quaint number. Will it be $250? $750 a barrel? For some people and some countries, even those numbers represent chump change.

Such oil prices may not unfold for a while, but now we can visualize the auction participants who will make those prices happen. It will be the hedge fund managers and the Silicon Valley billionaires among the global economies. Remember, the U.S., the E.U., China and others are already the super-rich among all oil buyers compared with many African, Asian and South American countries. Per-capital GDP in the countries that will ultimately compete between themselves for oil when it is truly scarce are many orders of magnitude greater than those who are starting to be priced out of the market today.