Friday, May 9, 2008

Will High Oil Prices Collapse the World Economy?

I got into a discussion about oil prices with another person on one of those ubiquitous internet forums, and like most such discussions, it led in all directions.

Among the points I made:

• The OPEC cartel-monopoly is a real factor in high prices OPEC is not the disparate, more competitive and loose confederation it was 10 years ago. It has better organization, better communication, and broad general consensus on getting maximum prices from its product, just as any other merchant would do.

• A second premise concerned conflict in Nigeria, and how that has fueled uncertainty in the markets.

• Mexico is having other problems affecting its production.

• The weak dollar means that investors prefer to put their money in commodities, particularly oil, and particularly in the futures market.

All of these things, I argued, had some impact on oil prices, too.

My “opponent” is a believer in the “Peak Oil” theory advanced in the 1970s. The “peak oil” argument has some validity, of course, but it is a phrase also designed to draw attention to one’s academic writing. There are billions of barrels of oil off the coast of Texas, Louisiana, and Alabama. There are unexplored oil deposits in Wyoming, ANWAR, and Canada.

The key difference is our “arguments” was that I was taking a short-term, practical view aligned with home budgets and my opponent took a “global” viewpoint. Within that context. I’d say my opponent had the moral high ground. Here’s the way he refuted my argument that dollar declines contributed to high oil prices:

"What's important to note is that during the time of dollar value appreciation, the cost of oil has also been going up. So, obviously, there's something else driving the high cost of oil. For example, since 2005, the cost of a barrel of oil has gone from 40 euros to 80 euros. In the same period the cost of oil in dollars has gone from 50 dollars to 122 dollars. So oil is up 100% in euros and 150% in dollars. So why are oil prices increasing? In my opinion, it is due to the fact that we've entered the age of Peak Oil. "

My internet buddy is right about one thing. We have an energy problem and we’ve got to do something about it. The media should flog anybody in government who has the slightest bit to do with energy policy. We have to do something or the doomsayers will be right. Should we build more nukes? Should we drill off the coasts? Should we drill in ANWAR? Should we put the Oil companies in leg irons or send them to the guillotine? Should we ban the use of petroleum based pesticides and fertilizer? Should we risk starvation by using corn and wheat for fuel?

Lots of questions, few answers.

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