Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
I also agree with the fundamental premise of Jerome's arguments--oil prices are going higher, due to increasing demand and limited opportunities for increasing supply.

In addition there is going to be significant variation in the price of oil over short term periods due to the unstable nature of many of the countries that produce oil and the political volatility that results.  And this political disruption accompanied with the view that the world's oil supply is diminishing, leads to incredible volatility in pricing, and the tempation to forecast off of prices that are artificially high.

But I think there is a tendency to over react, and forecast a much more rapid increase of prices than is likely to happen.  After all, isn't this the 2nd year, or is it 3rd, where Jerome has predicted a year end oil price of $100 per barrel?  I would think that your $50 year end price is equally as likely as Jerome's $100.

I would expect annual prices to go up steadily.  But within each year there will be enormous volatility.

But the increasing prices of oil, and the expectation that those prices will increase, will result in some significant changes in the energy industry.  First, higher prices will lead to less per capita usage of oil--as is true in most products.  Using the US as an example, at $1.50 per gallon, 12,000 annual miles of driving, and 18 miles per gallon, and two cars in the family--the average American family spent $2000 per year on gasoline.  The median family, if my memory is correct, makes roughly $44,000 per year, and I would imagine the tax burden (all taxes) would be roughly $9,000, so after tax the family has $35,000.  So gasoline represents 5.7% of after tax income.  At $3.00 per gallon, gas is 11.4% of income.  (I realize all of these numbers can be argued with, how many have two cars, what's the avg miles per year, tax rates vary, etc--but I think this analysis is in the ballpark).  This is a big enough increase to change buying habits.  The SUV is nice, but we can't afford it.  for some, public transportation is now an option,,,for others car pooling--cut mileage in 1/2 by carpooling and get rid of the 2nd car--save another $1000 a year in insurance, repair, etc.  People will be creative and change,,,some tomorrow, some next year--but people will change their spending habits on oil, and energy.

Second, more fuel efficient cars will come into demand,,,so driving will be more productive.  Manufacturers will put more premium on fuel efficiiency, and new technology will lead to more efficient cars.

third, other existing energy technologies than oil will be chosen for many applications.

Fourth, new technologies will be developed to replace oil.  Current technologies will be improved.

Fifth, new oil will be found, and more costly oil will be drilled,,,and now sold at a profit with higher prices.  This won't be enough to "save" oil, but it will mitigate otherwise explosive price increases in oil.

Fundamentally, people will just change due to the economic need to change, and the new opportunities to be successful by developing products and concepts that either use energy more efficiently, or provide sources of energy that are less expensive.

So it will certainly be an interesting and rocky time--but people responding to change coupled with human creativity will, IMHO, prevent the catastrophic forecasts we sometimes see.

by wchurchill on Sat Sep 9th, 2006 at 12:13:58 AM EST

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