Tuesday, May 18, 2004

Focus on Prices
It's hard to pick up a newspaper or turn on the TV news without seeing something about oil prices or gasoline prices. The NY Times Sunday edition had no less than three major articles, including this on the front page and a nice analysis of Saudi motivations in the Week in Review section. I liked the title of yesterday's Financial Times Online piece, "A new spike in prices raises fears for the world economy. But this is not the next great oil shock at least, not yet."

The FT goes into some detail on the causes of the current tight market, relating to higher-than-expected demand growth in the US and China, as well as concerns about Middle East security. Although it is a fine article, as far as it goes, I think it's also fair to say that what we are seeing today could be a dress rehearsal for a more serious situation down the road, relating to serious systemic supply constraints that I've discussed at length elsewhere in my blog. (See the posting of February 12, in particular.) Because whatever cause or set of causes to which the current conditions are attributed, I have yet to run across anyone suggesting that prices are high because the oil is simply not there.

True, production capacity has been stretched near the limit, with all the spare capacity in places that seem shaky for other reasons, but there is a clear sense that the overall global supply can grow from here to meet market demand, even if it takes a year or two to do it. That might not always be true, for reasons of access, inadequate investment, or actual geology.

As I said last week, I am fairly optimistic that the current prices will fall over the next four to five months, probably back to $30 or so. And it's not that hard to imagine that in a couple of years we could be back to $25 or less. Just look at the history of oil prices. In fact, I saw a quote over the weekend that made me much more confident in that view, with T. Boone Pickens proclaiming that "oil prices will never again fall below $30 a barrel." Statements like this, no matter how credible the source, are invariably wrong, and I love to bet against them.

But whether prices fall back soon or not is less important than the realization that there is a reasonable risk of a similar future crisis from which prices will not fall back, until we have made the enormous investments necessary to drastically reduce our dependence on oil. For that reason, it might just make sense to start now to adjust our habits accordingly.

By the way, my postings may be a bit spotty this week, as I'll be traveling on business.

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