Justin du Coeur (jducoeur) wrote,
Justin du Coeur

The Economist on Oil

For those interested in the oil-price mess, I commend this article from this week's Economist, which is an admirably calm viewpoint on the subject.

The main point of the article is to debunk the theories going around that there is something Weird and Interesting going on. On the one hand, they address the question of "peak oil" -- the notion that the world has reached its maximum oil production, and will now taper off quickly. To that, they make the point that there's good reason to believe that there's still a lot of oil out there: it's just becoming more expensive and politically difficult to explore and drill new sites. It's not that the oil isn't there; it's that we aren't working together to get at it. (Of course, there are all sorts of reasons for that, some of them arguably good ones. The point is that we're probably *not* running out of oil yet.)

OTOH, they pop the notion that there's a speculative bubble driving the price rise. While there *is* a good deal of speculation, it's still just a drop in the bucket (as it were) of the total oil market. And since it's physically difficult to hoard oil, the speculation shouldn't be able to affect prices as directly as most bubbles do.

Instead, they argue that the problem is one familiar to any first-semester economics student: supply vs. demand. They've been very finely balanced in recent years, which means that little shocks can produce strong effects. Worse, since both demand and supply are relatively inelastic (that is, they don't respond quickly to changes in price), prices tend to rise much more aggressively than they would in an elastic market that can alter supply and demand quickly.

They do point out that there is likely light at the end of the tunnel: oil supply and demand do *eventually* tend to alter in response to price. Indeed, it's already begun to happen -- consumption in the developed world is already down a modest but non-trivial amount. But the developing world's demand is likely to keep rising for the foreseeable future, and it takes a fair while for new supplies to come on line. So while prices are likely to level off and fall in the long run, high prices will probably be with us for some while yet, and there's not a lot that governments can do about that -- it's just a matter of harsh economic reality. The world wants more oil than it's producing, so prices rise until that equation balances.

BTW, for those who (like me) have a gut instinct that high oil prices *must* be at least a good thing for the environment, since they will drive consumption down, the leader article in the same issue dashes a bit of cold water on that. As they point out, the high oil prices are making it economically feasible to refine from things like tar sands, which are even worse from an environmental perspective than burning oil...
Tags: politics
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