May 4, 2008

Bite Size Bad News 3--Oil

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The benchmark price of crude oil, which was well below $70 a barrel a year ago, is now flirting with $120.

Think it’s a speculative bubble? Check out the announcement by Petrobras that it has discovered two large new offshore oil fields it hopes will make Brazil one of the world’s largest oil exporters.

There are only few problems, starting with the fact that new technology will have to be developed to deal with a couple of small technical difficulties:
  • Much of the oil is 32,000 feet below the ocean’s surface (the world’s current deepest well is about 9,000 feet).
  • That means pressures of 18,000 pounds per square inch, enough to crush a pickup truck into an unrecognizable hunk of scrap.
  • And temperatures of 500 degrees Fahrenheit, hot enough to melt some metals traditionally used in energy production.
  • Oh, yeah, layers of salt on top of the oil, a mile or more thick, absorb seismic waves and make pinpointing where to drill much harder than usual.
Get the feeling that if Brazil does get this oil out, it won’t be cheap?

That doesn’t mean that prices will never fall from current levels, especially as the incipient global recession deepens. But upward pressures are growing too—the effort to slow the growth of petroleum consumption in the US, Europe and Brazil by mixing in agricultural ethanol into gas and diesel have been the largest contributing factor in the sudden appearance of an international food crisis, characterized by shortages and spiking prices of staple grains. That looks more like a whipsaw than twin bubbles to me.

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