Tiffee, Brian Econ 2302.

65 Professor Sawyer June 16, 2013

Oil: Costs Are High and Rising! Summary: The article Case in Point- The Rising Cost of Energy describes oil as an exhaustible resource; explaining that once used it can never be reclaimed. Due to the rapid use of oil, it seems that this idea of scarcity has begun to set in the minds of oil suppliers. The article goes on to describe the transition commencing among the purveyors of oil, from light crude to heavy crude. These terms not only describe the difficulty of the oil extraction and refining processes but also the overall damaging effects the processes will have on the surrounding ecosystems. Light crude is easier to extract and therefore less harmful while heavy crude is more strenuous to access and refine resulting in much greater harm. The afore mentioned transition from light to heavy crude can be easily cataloged by the sudden urge to begin excavations in places such as Canada which is riddled with difficult to access oil. In the 1990s, places such as these were thought of as a waste of effort but since 2006, are revered as the new sources of oil. The idea of an exhaustible resource is further established, in this article, through the discussion of increasing price to make oil. In the recent past, oil producer paid roughly $6 a barrel to refine oil; however the cost has increased drastically to approximately $25 per barrel. Money is not the only increased cost. The extraction of heavy crude results in nearly three times the number of Greenhouse gasses when compared to light crude. Some, such as Albertas energy minister, Greg Melchin, believe that the benefits of oil out way the cost to refine it; while others, such as George Poitras, a Mikisew Cree tribe member, believe that the damage to the Earth is irreversible and is being severely understated. Opinion: I agree with the article, oil is being exhausted. As our society becomes more and more dependent upon oil the consumption rate increases and the quantity left to fulfill those needs decreases. Eventually the need for a new source of energy will be apparent, which I believe to be very soon. The idea that oil producers are moving towards a new basin from which to extract oil is somewhat disturbing in its implications. The need to extract more oil at a significantly increased hardship only solidifies the idea that the worlds people are overly dependent upon oil, and because of oils inherent exhaustibility, a dangerous problem. Secondly, the article mentions the opportunity cost to those in the future. I believe that this cost is most easily overlooked in the decisions made to further explorations into crude oil in the societys quest to fulfill an endless need. The demand however in my opinion does not out way the cost to those in the future. Not only will they not have access to the oil that is used today but will have to live with the

consequences of its use. The article lists some of these costs in the form of Greenhouse gasses and craters left from stripping the land of the oil. Some costs are not readily apparent however and in lieu of that often disregarded as an insignificant cost, usually a costly mistake. Lastly, I do recognize the need for oil and do not wish to undervalue its usefulness. However I do want to place an emphasis on its replacement as our primary source of energy in our near future. I believe this can be done if the will is great enough. It will require a more careful use of oil that has already been refined and the refining of just enough surplus to enact a transition to a cleaner source. Justification: Oil is an exhaustible resource by all definitions. It can be seen economically as scarce due to its finite quantity and inability to reproduce at a sufficient rate in which to sustain the needs of the people. The idea that the world has become dependent on oil and inevitably must break itself of the dependence can be stated economically as well. The law of demand states that price and demand are inversely related. This statement holds true with oil because as prices rise demand goes down and as prices fall demand rises, consequently dependence can be seen through the ratio of change in price to change in demand or elasticity. Dependence can be clearly observed by oils inelastic response to a change in price. In other words oils change in price results in a much smaller change in demand. This relationship is expected, and mostly due to the lack of substitute resources great enough to fulfill the need. Therefore there is a great demand for oil; enough demand to push suppliers to continue to explore methods of retrieval despite a significant increase in cost. The increase in cost along with the exhaustibility of the oil supply will cause a rise in prices yet only a small decrease in demand. Consequently, because the change in demand is smaller than the change in price suppliers will still wish to seek even further methods of retrieval. This is a destructive cycle that can cause severe hardship if not broken before the resource is depleted. Thirdly, the notion that the opportunity cost will fall more harshly on future generations. The idea of opportunity cost is that one gives up some benefit in place of another. I believe that opportunity cost correctly describes the situation. As a society we are disregarding the effects on future generations to further our progress. At some point in time oil will be exhausted and therefore unusable, and at that time only the irreparable damage to the Earth will remain, a cost that will affect every future person. This is where a choice becomes apparent, either bask in present benefit or relinquish it to further establish a future benefit. This is not an easy question to answer and is therefore debated constantly by economist and others. None the less it is clear that a solution must be found before the oil supply runs dry.