Thursday, July 24, 2008

The Economic Situation (8) - Good News about Oil

  1. The best cure for high prices is high prices. People respond to high prices by reducing consumption. Producers respond to high prices by increasing production. This is already happening. Consumption in the west is declining
  2. The United States is no longer as dependent on oil as it was during the first Oil Shock in 1973. Part of the reason is that much of the oil intensive manufacturing has moved to China.
  3. High prices encourage oil exploration. However, increasing production is not easy in the short term. A new oil field can take several years to bring into production. If the fuel is in a remote hostile environment, it may take even longer to bring into production.
  4. Rising oil prices make processes that extract oil from sand and shale economic. This will increase production.
  5. If oil prices remain high, new energy technologies will emerge to reduce dependency on oil.
  6. Despite OPEC’s efforts, the market for oil is relatively free. If prices remain high, consumption will reduce and production will increase, which will bring prices down.

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