Santa brings environmentalists oil and gas for Christmas

Forget lumps of coal in the stocking; Santa has much worse for the bad boys and girls of the environmental movement.

Santa's coming. You'd better watch out. / Image: Cruzarte, used under Flickr Creative Commons license
Santa's coming. You'd better watch out. / Image: Cruzarte, used under Flickr Creative Commons license

WASHINGTON, December 23, 2014 – In the 1970s, prognosticators predicted that he world’s then proven oil reserves would be exhausted by 2000; the most pessimistic predicted that oil shortages would be chronic until we exhausted the resource in the early part of this century.

Since then, proven oil reserves have continued to grow. New technologies have allowed us to tap reserves that were economically useless 20 years ago, and to recover more oil from fields that were considered depleted. High oil prices in the last decade did what economists said they would do; they encouraged exploration, technological innovation, and an increase in oil and gas supply.

The Stone Age didn’t end because we ran out of stones; the oil age will end, but not because we run out of oil. It will end when other technologies produce energy more cheaply than oil.

The collapse of oil prices since last summer has pushed the end of the oil age further into the future. It will not put most oil producers out of business; it will cull the least efficient producers from the herd. Most U.S. production is still in Alaska, the Gulf of Mexico, and other deep wells around the country, and it has chugged along for decades, through high prices and low. Shale oil producers are profitable on average at a price of $65 per barrel, but some areas are profitable at $25.

Producers are fast improving the technology and their efficiency. If prices fall to $40 and below, U.S. output is unlikely to be much affected. OPEC is no longer functional; only Saudi Arabia matters, and the Saudis have said flatly that they will not cut production to support the prices needed to keep other producers in the black or help them meet government budgets.

The reality is that output is unlikely to fall in the next few months. At the same time, demand is soft and likely to remain so. Oil will remain relatively cheap.

This is terrible news for firms that are investing in solar and wind power. Those technologies aren’t improving as quickly on the cost front as oil extraction, and power producers who might have thought about switching from fossil fuels to renewables will be having second thoughts.

At the same time, this is terrible news for conservation. Energy consumers have much less incentive to buy more efficient appliances or vehicles, and improvements there will be driven by government regulation rather than consumer demand. At $4 per gallon for gasoline, drivers might be tempted to switch to hybrids. At $2/gallon (this writer paid just under $2 yesterday), they would be more tempted to trade in their Volvos for Dodge trucks.

Energy prices have always been volatile, and no one could count on prices staying high or low indefinitely, but the huge potential output from fracking operations in North America – and even in Europe – will serve as a damper on volatility. If prices go above $80 for oil, production can quickly soar. It’s a better bet than it’s been in years that the real price of gasoline isn’t going to shoot back into the stratosphere any time soon.

We are still in the oil age, and barring extreme regulations or dramatic innovations in alternative technologies, the future belongs to hydrocarbons as far as the eye can see. The Keystone XL pipeline may be less viable than it was, but for environmentalists, the silver lining on the hydrocarbon cloud is pretty thin.

Santa has brought the world oil for Christmas this year. Perhaps environmentalists, Vladimir Putin, and the governments of Iran and Venezuela will be nicer next year.


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