Sunday, May 25, 2008

Oil, the good news

The big unknown in the oil market is the price elasticity of demand for the industrializing nations. In plain English, there is a price where China, India, and smaller countries which are transitioning out of the third world cannot afford the cost of the oil required for this transition, and if no substitutes are available, such transition will have to stop.

For those cheerleading for the price of oil to go down, this is a hopeful sign. Even here, things are still not simple. The demand for oil among industrializing nations is inflated by subsidies, but not created by them. If the market price per barrel of oil is $200, how many barrels does the Chinese or Malaysian consumer want, assuming he has to pay full price? Nobody knows exactly, but there is one fact that is very ominous, for me at least. Per capita consumption of oil in China could triple, and it would still be less than Mexico. My guess is that there is a lot more pain to be felt before this beast is back in the cage.

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