Crude oil has tumbled to prices not seen for five years. But Byron King says the energy industry can’t function with prices this low. Investment in the future is drying up, and so is the existing oil supply. And that’s why the long-term price trend of crude is still way up.

This from Rude Awakening:

As crude oil languishes near a 5-year low of $35 a barrel, forward-looking investors have good reason to suspect that a new bull market is about to begin. Sure, oil prices might continue slumping over the near term. But don’t kid yourselves; the long-term price trend is up…maybe way up.

Back when oil was selling at $147, I said that the world does not run very well at such lofty energy prices.  A lot of things just stop working at $147 for a barrel of oil, particularly things with a large energy component.  The airlines come to mind.  So something had to give.  The world economy could crash (no jokes about airlines here…), or the price of oil could come down.

As it turned out, we had both events.  The world economy hit the wall, and the price of oil came down in almost a straight line over five months. And gasoline is cheap again, which is a welcome salve for our ailing economy.

Let’s think through some of the macro-benefits of cheaper gasoline in the U.S.  The U.S. Energy Department statistics state that the nation burns about 9.4 million barrels of gasoline per day.  That’s about 395 million gallons (at 42 gallons in a barrel).  Let’s say a gallon of gasoline is $2.75 cheaper than it was back in July, when I was paying $4.40 per gallon.  Take 395 million gallons per day, times $2.75 savings per gallon.  That’s almost $1.1 billion PER DAY that U.S. consumers are saving at the gasoline pumps.  That’s over $32 billion per month of savings, or nearly $400 billion per year.

In a sense, the world oil industry has given the American people a huge tax cut.  Or call it a “bailout bill” for consumers, except that Congress did not borrow the money to fund it.  And that $400 billion is not just money coming out of the hides of Big Oil and those bêtes noirs like Exxon-Mobil or Chevron.  No, this is a $400 billion cheap-oil tax cut paid for by the Sheiks of Araby, and Mr. Putin of Russia, and Generalissimo Chavez of Venezuela, and Mr. I’m-a-Dinner-Jacket of Iran.  Could not happen to a nicer bunch, eh?

But no good deal is entirely a good deal.  Just as the world does not work too well at $147 oil, the energy industry does not work well with oil at $35.  If $147 oil was a problem, then $35 oil is actually NOT the solution.  Cheap oil might even be worse for the world over the long term.

What do I mean?  Well, at $35 per barrel of oil, the incentive for energy efficiency and conservation is not high.  Heck, people are back to buying SUVs, if they can get a car loan.

And low oil prices are a major stumbling block to building out the next generation of energy systems like advanced windmills, solar, geothermal, tidal power and advanced biofuels.  Really, the world needs these items sooner or later.

Also, the traditional energy industries need prices about $75 or so to keep up levels of investment in new projects that require several years to build out.  That’s just to try and maintain current levels of fossil fuel output, which are declining in any event.

That is, world oil production has already peaked at about 86 million barrels per day.  We were probably never going to change that overall fact of energy-life back with oil at $147.  But we sure aren’t going to change it now that oil is selling at $37.  It’s the Peak Oil argument.

Depletion, of course, is still with us all day and every day.  Indeed, we could see swift declines in oil output from some major oil provinces of the world.  Mexican oil output is already declining fast.  Russia may shock us in 2009 with significant decreases from some older fields.  Saudi Arabia is problematic, despite all the happy talk from Riyadh.  The problem is that most of the world’s oil comes from giant fields that were discovered more than 25 years ago.

When people say things like “There’s still a lot of oil out there,” they are not necessarily wrong.  But they mean that there is a lot of oil out there that is NOT in giant oil fields. It’s oil that you will not drill up with just a relatively small number of high-output wells, like in the big oil fields of Saudi or Russia.

The “lots-of-oil” crowd is talking about hydrocarbon molecules (not necessarily light, sweet crude either) in deposits that are more dispersed, further out, in deep water, under more rock or salt layers, with higher temperatures and pressures.  Or they are talking about heavy oil, or bitumen in tar sands, or kerogen in oil shales, or even some transformation of coal.

When people use the expression “lots of oil,” they mean the expensive stuff.  It’s oil that requires many expensive wells or immense processing facilities, drilled or built with technology that we have just barely invented.  And it’s the oil that you will never see if prices stay at $35 per barrel for long.

That’s why oil probably won’t stay at $35 per barrel for very much longer.

Source: The End of the Oil Bust