What is the Optimal Minimum Price for Petroleum?

[Ivan Seeking]

VINOD KHOSLA, co-founder, Sun Microsystems: I was recently at a conference where one of the senior executives of a major national oil company from Saudi Arabia, Aramco, came up to me and said, "Be careful." It was almost a warning. He said, "Be careful, because if biofuels are successful, we will drop the price of oil."

http://www.pbs.org/newshour/bb/environment/july-dec08/energytech_07-07.html

True or not, it is clear that any serious move away from our depedence on oil requires that the price of fuel be high. So, should a minimum price be set for petroleum so that, first, alternatives to petroleum can compete sooner than later, and next, so that foreign suppliers cannot manipulate the energy markets at will?

I tend to think so for this reason: Eventually, the price of fuel will be legitimately high enough to allow for competition, but artificial price fluctuations like those seen today, and in particular, the price drop that we will see, will hinder alternatives to petroleum until the need is dire and immediate. In the interest of national securiity and world peace, it is best to avoid that situation and act now.

But, even if we agree that a price floor is a good idea, what would be the right number?

PAUL SOLMAN: At the time we interviewed Khosla -- March 2006 -- oil was approaching $70 a barrel. He proposed a tax to kick in if oil fell below $40. Today those numbers seem ridiculously cheap, a price floor even at $70 politically feasible as never before.

The price of crude hovered around $20 barrel for about twenty years - since the shortages of the seventies - and it hit a low of $10 in early 2000. So we have seen a 1400% increase in eight years.

 

[neu]

To set the price floor, you would have to do so with taxes, as your quote says, as the saudis or whoever can sell it at whatever price they want.

This begs the question whether those in power are willing to do that. The idea is very good, but I can't be sure whether it is deemed a good political move. I think it could very well happen in the UK given the sway of opinion. I'm surprised to think this as I usually err on the side of pessimism in these cases.

 

[wildman]

It would also encourage oil production in the US. A lot of the remaining fields in the US are very deep or in difficult to get to locations in the Outer Continental Shelf. This is expensive oil and companies are reluctant to invest in drilling in these expense locations without a guarantee that the price will remain high.

 

[Ivan Seeking]

It would also encourage oil production in the US. A lot of the remaining fields in the US are very deep or in difficult to get to locations in the Outer Continental Shelf. This is expensive oil and companies are reluctant to invest in drilling in these expense locations without a guarantee that the price will remain high.

That's true. Environmentalists are often blamed when in fact the reason that we haven't pumped many wells, is cost.

I heard recently that that oil companies have not drilled on 80% of the land and ocean for which they already have permission to drill.