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The price of oil

Some time ago I had these thoughts about the high price of crude oil and the implications for the energy market. Well, the price of oil has been falling, rather fast, these past few months. High prices have forced people and businesses to economise on their use of oil. Sales of large-engine cars and SUVs are down. A perceived slowing in the pace of global economic growth is also hitting the price. New sources of supply, and spending on new refinery capacity, is also pushing prices down. Some of the speculative froth in the market which may have added to the high price of oil is also unwinding a bit.

The rise in the price of oil to nearly $80 a barrel last year triggered all manner of near-hysterical claims about how governments must act to drastically reduce our reliance on such a source of energy. But market participants were acting even as political and media blowhards predicted doom and gloom. There is nothing like a fast rise in the price of a key thing like energy to focus minds on how to adjust behaviour. The rise in the price of oil has spawned a plethora of ventures to develop new sources of energy; encouraged new drilling and exploration efforts to find new oil supplies, and encouraged people to economise on their energy consumption.

With any luck, if oil keeps falling, it will slow the flow of money into the coffers of thugocracies like Saudi Arabia and also crimp the ambitions of Hugo Chavez in oil-producing Venezuela. That has to be a good thing, although George Galloway might have a problem if oil-rich dictators lose some of their revenues.

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8 comments to The price of oil

  • That’s the beauty of the free market. If someone stumbled across a previously undiscovered and huge reserve of oil, prices would fall (ceteris paribus) without any kind of centralized authority to tell them to. I could be completely unaware that such a reserve had been discovered and put to good use, yet end up paying different prices at the pump and adjusting my behavior accordingly.

    What kills me is that people will complain and politicians’ approval ratings will drop when gas prices approach $3.00 (USD) per gallon, yet they don’t seem to mind paying $5.00 for one little cup of coffee at Starbuck’s. Inconsistent if you ask me.

  • The ever-excellent Westhawk had a piece up the other week about whether a high or low oil price was better for US security. After presenting two schools of thought, the conclusion reached was that higher oil prices are in the long term better.

  • Jacob

    “whether a high or low oil price was better for US security.”

    The best, for everyone, for US consumers, for US security, for Chinese consumers, for everyone except Russian tyrants and Arab Sheikhs and mullahs, is lower prices. But that just expresses an idle wish. There is not much we can do, or should be trying to do about it.

  • Millie Woods

    I feel like the Roman senator who repeated his mantra about Carthage but ’tis true, ’tis true – the world is full of oil and instead of holding us up for periodic ransom the ME suppliers should be cosseting us and behaving in a truly forelock clutching manner. After all except for their oil, they have nothing and are dependent on us for everything. The next time they pull a stunt designed to make our economies go wobbly, we should counter with a tit for tat on selective amenities that keep their failed states and economies afloat. Treating miscreants well is a lose lose strategy. The oil consuming nations seem to have a problem learning how to deal realistically with the oil producers’ shenanigans.

  • Jacob

    “The oil consuming nations seem to have a problem learning how to deal realistically with the oil producers’ shenanigans.”

    Forget about a coordinated international effort to do this or that. Never worked, will never work. Markets are stronger than governments, and surely stronger than international cooperation efforts will ever be.

    “the world is full of oil ” ? Maybe. Maybe that’s what the falling prices tell.

    “learning how to deal realistically with the oil …”
    Means: leave it alone. The invisible hand will deal with it. There is nothing “we” (meaning a collective “we” like a government or a coalition of governments) can do.

  • Gabriel

    But, Jacob, the international oil market isn’t remotely free whatever our governments do so the hands in question are all too visible. If other governments are going to manipulate the supply in their own interest, would it not be better for ours to try and ameliorate this?
    Likewise presumably if Microsoft formed a milita and started forcing rivals to close down you would support state action to correct this market interference. Right?

  • Likewise presumably if Microsoft formed a milita and started forcing rivals to close down you would support state action to correct this market interference. Right?

    The one valid function of government is to protect people from those things from which they are not able to protect themselves. If Microsoft starts resorting to armed force, then government interference would be justified.

  • Michiganny

    It is nice to know that petrodollars are no longer flowing in quite the same torrents.

    A chief knock-on effect will be to punish the states that treat their national economies (and societies) as appendages of their nationalized oil companies. Ahmadinejad’s Iran, for example, will probably come to tears for the insane command economy he has reinforced. For instance, halving the price of biscuits while doubling the wages of laborers in biscuit factories was a nice sop in that tea-drinking culture. Such silliness will look less enlightened when he can no longer top-off shortfalls in one industry or another with oil money largesse.

    It would be even nicer to see more dominoes fall in the other direction. The list will be long if oil returns to under $20/barrel, its price in that long ago year, 1998. Should the price go that far, it will be a nice time to pick up some oil shares and that samovar I’ve been promising myself.