Friday, April 17, 2009

Cheap oil forever

Some surprising facts about oil:
...For the past 200 years, commodity prices have been trending downwards, thanks to new technologies, greater efficiency in extraction and the substitution of one commodity for another (which explains the high correlation between commodities prices).

Bank Credit Analyst, a research firm based in Montreal, has data showing major industrial commodity prices are 75% below where they were in the year 1800, after adjusting for inflation. Despite all the worries over "peak oil," the fact is that the major bear markets in oil have been demand, rather than supply led. And when demand eventually picks up, there's usually some new alternative (nuclear energy, natural gas, green technologies) waiting to pick up some of the slack.

The real price of oil today is now at the same level as in 1976 and, before that, in the 1870s, when oil was first put to mass use in the United States. This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil. The experience of the 1980s is instructive in the current context as well.
I imagine that some day the age of petroleum-based energy will come to an end. Prices indicate, however, that we still aren't very close to this occurring. This in turn undermines the Obama Administration's push for alternative energy and promises another big government boondoggle.

Indeed, even you accept the premise that oil is a rapidly dwindling commodity it does not mean that government intervention is required. If oil is running out prices will increase -- simple supply and demand. If prices go up it will serve as a signal that investments in alternative energy are needed, prompting businesses and entrepreneurs to pursue and distribute such technologies in a quest for the all mighty dollar (the virtue of greed and selfishness). It will also prompt greater conservation, as we saw last year when rising gas prices prompted people to drive less.

Government intervention in the energy sector can only be at best superfluous, and at worst a complete waste.

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