Friday, May 23, 2008
You can't stop him.......
.........you can only hope to contain him.
Among the various things that came out of the basketball career of Michael Jordan, one of them was the introduction of this particular cliche to the sporting world. As it happens, it also describes the current oil market. The important point is that oil prices are high because of a real supply-demand imbalance that has been coming for five years or so and is likely to continue for at least another few years more. This isn't to say that there aren't lots of oil speculators around, but in the end they are not responsible for $135/bbl oil.
I've changed my my mind on this a little bit, largely because of two things.
1. The political sclerosis, NIMBYism, anti-Americanism and other bugaboos surrounding energy production are very real, to the point where we might as well consider them just as real as geological survey results. Oil exploration demands a great deal of energy _and_ time. If we had done certain things differently five or ten years ago, things would be different.
2. The limiting factor in oil production isn't the amount of oil available, but the rate at which it can be extracted. This is obvious in context, but has important consequences for time frame. A new oil field might have X billion bbls of oil there, and as technology improves the percentage that is recoverable goes up. But, the amount that can satisfy the immediate demand in the market might be marginal and in any case is determined by the extraction rate.
The world oil market won't be in equilibrium until we know the point where the price is too high for China and other countries in the early stages of industrialization to continue on that road. If we can look into the future far enough there is reason to be optimistic. Unlike the rest of the developed world, America likes to solve its problems instead of pretending that they don't exist. There's no reason why this has to be an exception. But for that to happen, the American people have to come to full appreciation of the scope of the problem and that hasn't happened yet, though it probably will soon.