Tuesday, June 3, 2008

Demand Destruction And Price Pullbacks

Oil powers the modern industrial world and every single moment there is less oil than there was the moment before. The supply is headed effectively to zero. Discoveries of new fields or better drilling technology to better exploit existing ones don't change the overall picture. Fields do not fill back in. Even if demand weren't increasing, this would mean an eventual shift to a pre-industrial world. That demand is increasing rapidly thanks to a couple billion people in India and China buying cars and building skyscraper metroplexes just means that the eventual shift will come that much sooner.

Markets allow for speculation and this does run up the price of oil a bit. This also means that the price will pull back-- maybe even considerably-- when speculators take their profits. I wouldn't be surprised if oil fell ten or twenty dollars per barrel in the near future, but I also expect the price to run right back up toward $200. At that point, however, there will be a great deal of demand destruction. U.S. Americans in particular will have had to abandon the "American (read: suburban) Dream" and therefore will simply not be using nearly as much oil per capita. They will be out of the bidding. Prices will remain high enough to force people to keep living in walkable urban environments. Recall that the supply will still be heading toward effective zero while the Chinese and Indians will be using their new wealth (remember all the factories that got built in these places while factories were being dismantled here and all the jobs that disappeared from these shores and reappeared in Asia?) to live like we used to here. Don't be too upset by this, however; it won't last long in India and China either, certainly not nearly as long as it lasted in the U.S.