Memo To Time Mag: Oil Will Not Get Cheap, World Will Not End.

There's a wrong-headed article in the current issue of Time Magazine. In "Over A Barrel" senior writer Bryan Walsh asserts that "low" oil prices triggered by a boom in supply from places like North Dakota's Bakken formation and Canada's oil sands are set to destroy the world.

Talk about jumping the gun. Yes oil may have been cheaper a week or so ago when he wrote the piece: Brent crude swung from $128 a barrel in March down to $90 a barrel recently.

But this week it's back up to $100. That ain't cheap. But neither was it at $90, which is still more than twice the price of the lows in 2009 and higher than at any time before 2008. That's expensive. At least to anyone but Walsh.

Not only does he want oil to be expensive, he wants there to be shortages of it. "One clear benefit of reaching Peak Oil," he writes, "was that it would force the world to find alternatives fast."

He writes that "there's one major loser from inexpensive oil ... and that's the environment." Because burning oil generates "about 40% of the greenhouse gases that come from fossil fuels."

Cheap oil, he insists, will likely "undo the nascent green revolution." And this will literally mean the end of the world: "With climate change already a dangerous reality ... the world may not be able to withstand another missed chance to break away from oil."

Most rational Americans prefer cheaper oil because then they can afford to drive and fly more places and because it means fewer of our dollars going to OPEC. But not Walsh.

He wants Americans to voluntarily give up using their cheap and reliable vehicles powered by gasoline and diesel in favor of plug-ins like the Chevy Volt and Nissan Leaf and maybe even the Tesla (if you're rich).

But wouldn't you think that if "expensive" oil were going to spur people to buy a plug-in more would have done so already, given that over the past year, on average, we've seen the highest gasoline prices in history? They haven't. Walsh admits that the Chevy Volt and Nissan Leaf "have sold more slowly than automakers expected, even with large government subsidies and, until recently, high gas prices."

Give me a break. "More slowly" is too kind, considering that the 8,800 Volts sold in the first half of 2012 are woefully short of G.M.'s early forecast of 45,000 units. And "government subsidies" doesn't do justice toGeneral Motors' recent admission that nearly a third of the Volts it does sell are bought by the U.S. government the federal tax credits of $10,000 per car, and tens of thousands more per car in other taxpayer handouts.  So far the Volt has been a commercial flop, so Walsh is right when he says, "cheap oil could set the mainstreaming of electric cars back even further."

Hold on though, I have some good news for Walsh, sort of. Contrary to his fears, oil, and gasoline, are not going to get cheap any time soon.

Sure, we will see a boom in supply in the years ahead. Drillers will figure out how to crack oil out of all sorts of tricky geology, especially in North America. In fact, Prof. Amy Myers Jaffe of Rice University's Baker Institute wrote recently that "By the 2020s, the capital of energy will likely have shifted back to the Western Hemisphere, where it was prior to the ascendancy of Middle Eastern megasuppliers such as Saudi Arabia and Kuwait in the 1960s."

But there's a twist in this supply miracle. Even if they came to pass, increased oil supplies would not necessarily mean lower prices. Here's at least five reasons why.

Oil, like all globally traded commodities, is priced at the margin, meaning that the costs incurred in satisfying the last barrel of demand (finding, drilling, fracking, transporting, etc) represents a floor to prices. If a producer can't sell that last barrel for more than it cost him to produce it, he won't make another one, right?

Well, there's still a lot of cheap oil in places like Iraq that can be brought to market for less than $20. Yet according to the analysts at Bernstein Research, the marginal cost of producing a barrel of oil was $92 in 2011. This might seem high, but it makes sense when you consider that ever more supply is coming from smaller, deeper, tougher fields. Oil from the Bakken needs sustained prices north of $70 to be profitable.

Second, the world's big oil exporters are not about to let the price of oil slump for long. Sure they might open the spigots to replace oil that gets knocked off line in Libya or Iran. But they need higher prices to balance their budgets. As Bernstein points out, even at $125 per barrel for Brent crude, 8% of big oil producers ran a budget deficit in 2011, while at $90/bbl 58% would be running a deficit. The big producers, especially those likely to feel the continuation of the Arab Spring, will not hesitate to cut output in order to keep prices pumped up. To keep from getting overthrown they've got to spread the wealth around among the citizenry.

Third, there's still plenty of risks to supplies. Iran has cut its output as sanctions have dried up buyers. Brazil's output has fallen in the past year as bureaucracy and politics ties up development of bountiful offshore reserves. Even seemingly placid Norway had to cut offshore production in recent weeks because of an oil workers' strike (finally resolved on Monday).

Fourth, demand growth remains strong even in the face of global economic malaise. Bernstein expects China to be demanding 2.8 million bpd more in five years than today. Remember, all that new demand gets satisfied with expensive marginal barrels.

Fifth, decline rates are steep, with explorers unable to replace produced reserves with new ones. Sure the U.S. and Canada have a host of big new oil growth areas, but production declines in big fields average roughly 10% a year. This means every three years the oil industry needs to discover and develop the equivalent of another Saudi Arabia. Bernstein points out that the world uses roughly 30 billion barrels of oil a year, but outside of OPEC drillers are only finding 15 billion barrels a year, and what they're finding are those smaller, deeper, tougher, high-cost fields.

So this very real likelihood of higher oil prices despite ramping supplies should be good news to Walsh. As oil prices get comfy around $125 to $150 a barrel more and more of us may finally buy Volts and Leafs.

But we're just as likely to buy cars and trucks that run on natural gas. The same techniques that will bring more oil supplies have already unlocked enough natural gas to meet global demand for centuries. Clean burning natgas has gotten so cheap that power utilities have been switching away from coal. What's more, natgas can power cars either as CNG, LNG, or even turning it into ethanol. When it comes to carbon emissions, natural gas is a big improvement over oil.

Oil's not going away, but hopefully if we switch enough coal and oil over to natural gas we'll keep sufficient carbon out of the atmosphere to convince Walsh that the sky isn't going to fall on us after all.