America's Oil Crisis

Sunday, June 08, 2008

I think it's time for Americans to stop looking for someone to blame for high oil prices and realize it's the inevitable outcome of years of low prices, over indulgence and blistering new economies. Americans, enjoying low prices for a gallon of gas, decided to create increasingly less efficient cars in order to drive around in larger and larger automobiles. We indulged because we could. Now, consumers have finally been forced to change their habits and GM and Ford are laying off thousands and thousands of employees and ending sport utility vehicle production lines.

The BRIC economies are exploding. China and India have sustained greater than 10% gross domestic product growth rates for years now requiring surges in the demand for oil. China houses two billion people, almost a third of the world's population. Add ten percent gross domestic product growth and you've created an incredible strain on the supply of crude.

Speculation in the futures market is also not the problem. Futures markets are unlike other markets in that every transaction is a contract between a buyer and seller. For every buyer in the market the is an opposing seller at a given price. The market price has increased because all the players in the market believe the price should be $138. Doing a simple thought experiment, if you were a player in the oil market what direction would you bet? Up, right? Certainly, no market goes up forever and oil will find a top and many will lose money. But, it's a dangerous proposition to step in front of a runaway train. But, in the long-term, if oil continues to be an important source of energy and we have an ever growing population with a fixed supply, prices will increase until changes are made.

Americans need to stop complaining and realize: the best thing for high oil prices is high oil prices. High prices stimulate a growth in supply to capture the new, larger margin. High prices also create much greater incentive for alternative fuel innovation. Oil at $20 does not spur much interest in alternatives. But, oil at $135 creates a great deal more interest and makes previously cost ineffective alternative fuels, effective.

So, stop looking for the scapegoat. Nothing will be solved with "windfall taxes" on oil companies. Nothing will be solved by increasing regulation in the crude futures market. Nothing will be solved by gas tax holidays. Nothing will be solved by complaining. Make the adjustments to your lifestyle because oil doesn't care how much you hurt, you have to pay for it, you have no choice. Realize, understand and adjust.


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