Triple-Digit Oil Prices Ahead?

by Richard T. Stuebi

Last week, as reported on Yahoo!, the chief economist of the investment bank CIBC went on record that “We’re in a world of triple digit oil prices for the foreseeable future,” beginning by the end of 2008.

Increasingly, I’ve been hearing through the grapevine prognostications of $100/barrel oil. I put a lot more weight on CIBC’s view than on Hugo Chavez’s. Why? Based in Canada, CIBC prides itself on being a banker of note to the huge Canadian oil and natural resources industry. Besides, Canadians in general seem less prone to hyperbole than we Americans (or Venezuelans). As a result, I expect that a firm such as CIBC doesn’t put out such statements very lightly.

What does $100 oil mean? By my calculations, each additional $10/barrel increase in oil prices, translates to about $0.40/gallon in gasoline prices — assuming no changes in oil transportation costs, oil refinery economics and oil taxation. So, if we’re seeing gasoline close to $3.00/gallon today with oil at $80/barrel, I would expect almost $4.00/gallon at $100 oil.

Higher prices for motor fuels should provide further support for the emergence of biofuels markets (both ethanol and biodiesel). Although biofuels continues to receive lots of public sector push and mass-market discussion, the economics of biofuels have suffered recently, as feedstock prices (for corn and soybeans, respectively) have been bid up by surging demand for biofuel production. The price spreads between feedstock and fuel have become so narrow that biofuels producers now have little opportunity for profit. With higher prices in motor fuels markets, there is more prospect for investments in new biofuel production to be profitable, and for existing biofuel producers to return to reasonable profitability.

Perhaps more interestingly, higher oil prices will provide greater impetus — both from the government and from private sector investments — for the development of next-generation biofuel technologies (e.g., cellulosic ethanol, algae-based diesel), coal-to-liquids and gas-to-liquids projects, oil shale retorting approaches, and the hydrogen infrastructure. These are very capital-intensive and long-term opportunities that many parties are leery of pursuing, in the fear that oil prices will fall back to lower levels and render the efforts uncompetitive and therefore wasted.

If we are truly going to wean ourselves off of oil, we really need high oil prices for a long duration, in order to provide ongoing economic sustenance and continuing urgency for the development of these new energy technologies. The forecast of triple-digit oil prices should therefore not be something to dread, but rather something for economic opportunists to seize.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

7 replies
  1. Fritz
    Fritz says:

    I don't disagree with Rubin's assessment, but your conjecture that a Canadian's analysis might be more reliable just because he's not American or Venezuelan doesn't necessarily follow. Because he's working for Canadian Oil, he's expected to give good news about how well Alberta tar sands will grow while OPEC and the NOrth Sea and Cantarall plummets in production.

  2. Burl Haigwood Clean
    Burl Haigwood Clean says:

    The oil price is just one slice of a very contradictory not-so-free transportation fuel market. When you consider the real cost of oil (including external costs) the GAO estimated oil to cost $120 per barrel in 1990. So it looks like the real market price is finally catching up. But the market price is only one piece of a very confusing public policy & market place puzzle. Academics and researchers need to give some attention to the current “glut” of ethanol and use it as an example to study the longer term impacts and obstacles of introducing more alternative fuels based solely on price and the impact of not having an equalizing/safety net public policy pushing demand. We can use the current ethanol “glut” as a great example of the risk of price only.Baseline: The nation is facing record oil prices and decreasing gasoline prices. Consumers buy 140 billion gallons of gasoline per year and 6 billion gallons of ethanol are included in the mix. Why is there a glut of ethanol when the nation is importing millions of barrels of gasoline and gasoline blending components everyday? If ethanol is selling today for $1.00 per gallon below the price of gasoline wouldn’t oil companies want to buy ethanol and pass those savings along to consumers or their dealers? If the nation is trying to reduce it’s addition to oil and protect the national interest why are oil companies buying RIN credits instead of just buying the cheaper available ethanol? Wouldn’t buying more ethanol help increase fuel supplies and reduce the price of gasoline and wouldn’t that help their customers? Is there really a free market when it comes to gasoline and consumer choices? BurlHaigwoodCFDC

  3. Burl Haigwood Clean Fuels Development Coalition
    Burl Haigwood Clean Fuels Development Coalition says:

    The oil price is just one slice of a very contradictory not-so-free transportation fuel market. When you consider the real cost of oil (including external costs) the GAO estimated oil to cost $120 per barrel in 1990. So it looks like the real market price is finally catching up. But the market price is only one piece of a very confusing public policy & market place puzzle. Academics and researchers need to give some attention to the current “glut” of ethanol and use it as an example to study the longer term impacts and obstacles of introducing more alternative fuels based solely on price and the impact of not having an equalizing/safety net public policy pushing demand. We can use the current ethanol “glut” as a great example of the risk of price only.Baseline: The nation is facing record oil prices and decreasing gasoline prices. Consumers buy 140 billion gallons of gasoline per year and 6 billion gallons of ethanol are included in the mix. Why is there a glut of ethanol when the nation is importing millions of barrels of gasoline and gasoline blending components everyday? If ethanol is selling today for $1.00 per gallon below the price of gasoline wouldn’t oil companies want to buy ethanol and pass those savings along to consumers or their dealers? If the nation is trying to reduce it’s addition to oil and protect the national interest why are oil companies buying RIN credits instead of just buying the cheaper available ethanol? Wouldn’t buying more ethanol help increase fuel supplies and reduce the price of gasoline and wouldn’t that help their customers? Is there really a free market when it comes to gasoline and consumer choices? BurlHaigwoodCFDC

  4. Leo Boulton
    Leo Boulton says:

    Some food for thought: Do high oil prices benefit anyone? Usually Oil rich countries are under-developed nations like Nigeria and Venezuela that are prone to corruption. Consumer countries don't get anything form it either, of course… we defiunitely need a solution.Confluence

  5. Warwick Taylor
    Warwick Taylor says:

    Do we really want to be promoting biofuels? Firstly, their production is in some cases using land that should be used for growing food. About three months ago there was a protest in Mexico against the rising price of tortillas. The increased prices resulted from corn being used for biofuel rather than food.Secondly, the combustion of biofuels burn greenhouse gases.Thirdly, extraction of biofuels from crops uses energy too.It would be much better for us to conserve energy and make better use of that that nuclear furnace that is about 93 million miles away.Unfortunately, our government here in New Zealand talks a lot about climate change but is doing very little to help ordinary citizens to conserve energy and make use of solar energy. There are schemes to assist people to insulate their houses and install solar hot water heaters but these are not well-publicised for fear that the meagre budget set aside for these measures will be blown!

  6. Y
    Y says:

    $100 oil price will come soon. When all the alternative fuels are at its infancy, our main energy source has to be fossil fuel. But how to live along with 3-digit oil price while reduce fuel CO2 GHG emission? A best answer is to increase fuel efficiency. How and where is the solution? Based on the current 25% engine efficiency, the whole world lacks feasible solution and technology until now — High Efficiency Integrated Heat Engine (HEIHE) is just invented and patented recently. This innovative engine structure has been posted at wfeast.com for comments and funding supports. The inventor of this green engine is expecting to see double fuel convention efficiency, thus double gas mileage, once it is implemented. Based on HEIHE architecture, 21st Century engine revolution is waving to us. I believe any investment will definitely trig this engine revolution, making this innovative green engine a reality.HEIHE will benefit all the earth dwellers as you deserve:1) Green Jobs —- Ten thousand jobs needed to retrofitmillions of existing dirty engines;2) Energy Conservation —- By higher fuel efficiency;3) Emissions Cuts —- Reduced CO2 GHG discharge from engine;4) 35 MPG in the near future, 60 MPG in 5 to 8 years.HEIHE —- Welcome to our energy hungry world!

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