Is the price of oil today too high given the fundamentals? Could be. Is it
too low? Could be. But one thing I'm sure that's too high is the confidence
on the part of those who insist they know the answer.
Particularly dramatic in this growth has been China, whose petroleum
consumption between 1990 and 2006 increased at a 7.2% annual compound rate. It's always amusing to project these impressive exponential growth rates. If that rate of growth were to continue, China would be using 20 million barrels a day by 2020, about as much as the U.S. is today. By 2030, China would be up to 40 mb/d, twice the current U.S. consumption.
To summarize, I think we will see some net production gains this year, and
expect this to bring some relief for oil prices. But I cannot imagine that the
projected path for China above will ever become a reality. Oil prices have
to rise to whatever value it takes to prevent that from happening.
Over the last couple of weeks, oil has gone from grasping for $150/bbl to sitting just over $120/bbl. So if oil continues to decline another couple of dollars (and I have no reason to think it won't), then strange as it seems oil will have dropped 20% from its high and we can officially declare a bear market for oil.
At the risk of stating the obvious, we don't know how long this will last. But now that the sheer shock of oil prices has abated a little bit, we have the opportunity to look at the bigger picture. We've all heard the story about how industrialization in China and India is going to drive the price of oil up, but the story doesn't end there. In the short term we can maximize oil production and in the long term we will be able to use electric power for transport.
The oil crisis has been brewing for a long time, and it will take a long time to unwind. By all means we need to drill for oil in ANWR or whereever we can find it, but even if we do, and even if the price of oil goes down to $70 or so, the oil crisis won't be over until we have a sustainable, reliable, and affordable source of energy for transport, and after that for energy in general.