The “Perfect” Oil Price: Or is it?

Saudi Arabia’s Oil minister’s declaration earlier this month that oil prices were “perfect” notwithstanding, the Organization of Petroleum Exporting Countries (OPEC) are not the only ones thinking about what it the ideal long-term oil price. Naimi was hailing a $75 oil price, which he deemed ideal for “all investors, consumers, and producers” whom he described as “very happy” with that price.
Is Mr. Naimi correct? Is everyone happy with $75?
The industry perspective seems to be that $75 is needed to keep investments in high cost oil from deep water and Canadian tar sands flowing. Producers like $75 as a level around which national budgets can be easily met. Mexico earlier this week locked in a $57 floor, purchasing a $1 billion hedge from Barclay’s Capital, Deutsche Bank, Goldman Sachs and Morgan Stanley. Speculators who don’t like the dollar don’t want to see oil prices fall below $75 or their long positions would become less profitable. Environmentalists like $75 because it is high enough to encourage investment in alternative energy. The U.S. economy is seeing economic growth in a $75 world so $75 doesn’t seem all that harmful to the economic recovery (though it remains unclear if this is correct). American drivers might not be tickled pink with $75 but at least it is on the low side of the level at which they consciously restrict their driving. And, Chinese drivers are continuing to buy automobiles, or so the argument goes.
Hence the thinking that $75 is “perfect.”
But there are two reasons $75 is too high.
Reason one is that a third of the world’s population cannot afford fuel at this price. How perfect can a price be if it leaves billions of people in Africa, Latin America and Asia in dire poverty with no heating, lighting or cooking fuel?
The second reason should be more obvious to OPEC, given past history. A $75 oil price leaves all their competitors in place and then some.
The world is moving rapidly to energy-efficient technologies and new paradigms for energy systems. At $75 a barrel, almost every conceivable scheme to replace oil can likely find commerciality: shale gas, coal-to-liquids, and electric cars potentially running on sources like wind or, assuming some scientific breakthroughs, solar. The higher the oil price, the faster and easier it will be to put disruptive technologies into play.
My husband bought me a Kindle for the holidays. At $30 to $50 dollars for a hardbound book, it will easily pay for itself in a short period of time and ends the family argument about who gets the last three inches of bookcase space in our study. The Kindle is what specialists call “a superior technology.” The outlines of what will be “superior technology” to oil are on the horizon. Without fear of low oil prices, superior technologies will find their way to market, perhaps faster than OPEC believes. Nissan starts selling its plug in cars and equipping charging stations in Europe in 2010.