Wednesday 10 September 2008

Pic of the day: Yes, in Japan - and many European towns as well - walking is considered a completely natural use of the human body. But in America, neither society nor its citizens are adapted to such an activity. And that's how it will stay, probably, if the oil price falls back to anywhere near its old levels.

Oil under $100

The price of crude oil tipped briefly below $100 last night, and I'd love to write about this in great detail. But that kind of ambition was what caused me to fall half a year behind in the first place. There is no end to the writing of books! So instead I'll just quote what I wrote elsewhere to a more limited audience:

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Crude oil dipped under $100 for the first time in a while. Part of it may be the stronger dollar, a reaction to the Euro zone going into recession while the US has not. This currency movement may be premature and certainly fragile, since the US avoided a technical recession by inserting a fiscal stimulus package, driving the economy into plus for a few months. In contrast, the European central bank has focused on fighting off inflation. Even though the European labor markets are less flexible (as are the European workers, if nothing else then because of their age), fighting inflation is more likely to give you a stronger currency in the long run. When the dollar goes back to its destined tumble, the oil prices will again rise automatically.

Despite the nature of the price fall, OPEC reacted with a decision to cut production. Since there is a lead time on production changes, this implies that they expect even lower prices at that time, perhaps significantly lower. An earlier article in Businessweek speculates that oil may hit $80 per barrel.

The other element to the price fall is of course the reduced demand. The current oil crisis was never a supply shock like those of the past, but came from a global boom. Now that demand is falling in the US and Europe, there is likely to be plenty of oil for a while. The panic over "peak oil" was premature, not because there is no peak oil, but because peak oil does not mean that all wells suddenly go dry. It just means what it says, the production peaks and then gently slides over the coming years. Some years may even see higher production than the previous, but over time the supply will shrink. Before that, we should have plenty of alternative energy sources. In fact, the worst that could happen now would be a temporary return to "business as usual", where all investment in renewable energy goes into coma until the next price shock.

What this development could do for the US election, and thus the future of mankind as a whole, is still uncertain. Cheaper gas may be seen as an accomplishment by the current administration and make "4 more years of Bush" seem less disastrous. On the other hand, it would strenghten the "we don't need no stinking drilling" faction which is squarely gathered on the left.