Gasoline, oil sands and marginal cost

The price of gasoline at our local gas station has gone down by 11 cents a liter in the last couple of days.  This coincides with this article about concerns for the future of the Alberta oil sands project.

Oil from the Alberta tar sands is expensive to extract and illustrates the workings of marginal cost.  As everyone knows price is equal to marginal cost, the cost of producing the last unit.

As demand for oil has increased the price has gone up making it economic to go after more difficult deposits such as the tar sands.  This may keep up production but I fear that rather than allowing economic growth to continue it just slows down the rate of negative growth.  Economic growth would be more likely if marginal cost were falling with increasing production.

It also means a reallocation of financial resources to maintain our energy use which must be causing problems throughout the rest of the economy.  The more we spend on oil the less we have for other products.

We should not assume that the cost of exploiting the oil sands is consistent through the whole deposit.  It could be the marginal cost will keep increasing as the easiest of the deposits is depleted.

A further problem for oil sands producers is that if the price of oil falls as a result of an economic slowdown, then they may not get enough to cover their costs and will have to stop production.

Probably most of us Canadians benefit from the oil sands but we shouldn’t be too complacent.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

The European and world-wide economic crisis

Probably the best (and politically impossible) way to deal with the European and the world-wide economic crisis would be to write off all debt and start over with a new way of creating money – one that is not based on debt.  There is so much debt now that it is hard to see that it can ever be repaid.

If there is any such thing as funny money it has to be the money we now use which is based on fractional reserves and debt.  Throw in the interest which is charged on the debt-money and we have a ponzi scheme.  So long as there is steady economic growth it sort of works but as soon as there is an economic slowdown or decline it crashes.

I have tried to explain how money is currently created and some of the problems in an essay “LETS go to market: Dealing with the economic crisis” posted on this  weblog.  I also propose an alternative way of creating money based on the Local Exchange Trading Systems currently being used in several locations around the world.

%d bloggers like this: