Earn What You Spend

When oil men like T Boone Pickens become increasingly concerned about the availability of oil, you know we’re in for a problem.  This past summer, we saw a historic run-up in the price of oil, but it has since collapsed, currently bringing it to levels not seen in years.  

Yesterday, the International Energy Agency, the world’s leading resource on oil, released their newest report, the World Energy Outlook 2008.  Let’s just say things don’t look great: 

A lack of investment in new sources of oil risks a supply crunch worse than the problems that pushed prices to $147 a barrel this summer, the developed world’s energy watchdog said on Wednesday.

The IEA predicted that shrinking demand would be a long-term phenomenon…

But meeting the demand growth is secondary to the big challenge of compen­sating for the fast-declining production from the world’s older fields, the IEA said. 

So even if demand continues to soften, which it is expected to over the new few years as we deal with our economic crisis, there is another, far more serious problem we have to face: we’re running out of oil. Our current break in oil prices is just a blip on the radar - even if the growth of demand does not accelerate as quickly as it has in the past, we’re severely limited by the supply chain.  And that means much more expensive oil.

The current fall in gas prices could not have come at a better time: consumers are already being hit everywhere they turn with higher prices, lower wages, and more expensive debt.  These falling oil prices can be seen as a small break for the consumer, a de facto stimulus.  But this trend is temporary - it is only a matter of when, not if, oil and gas prices will rise again.  

Note I don’t think increasing oil prices is necessarily a bad thing - what the market needs more than anything are clear incentives to develop alternative sources of energy.  And nothing works as well as the market forces of supply and demand.  The question, as one college professor drilled into my head years ago, is what is the cost of this adjustment to the new price of oil? Yes, the market will adjust regardless and find new efficiencies, even if we do nothing.  It just so happens the side effects of the adjustments and the new “efficiencies” may differ drastically from the future we envision.   

Our energy policies, then, need to be proactive rather than reactive.  Our economy, and our future, depends on it.