The Falling Price of Oil

The price of oil right now is sixty percent off its July record price. Speculation certainly played its role in the rising prices of the last few years, as Amy Myers Jaffe (with whom I had an exchange in the journal Survival last August) pointed out-and I agree that the abandonment of oil by the speculators played its role in the recent drop. So did the smothering of the earlier, strong demand growth by the stiff $150 a barrel price tag (and a global economic crisis).

Nonetheless, while providing some much-needed relief, these developments do not change the essential picture. Even if demand is slightly down in 2008-9 from earlier years, this will not last forever. Indeed, the lowered prices are setting the stage for new consumption growth-just as world demand grew again in the 1980s (though, as the current economic crisis demonstrates, there are plenty of reasons to think the road ahead is going to be a rocky one, the availability of energy supplies only a part of that). And barring unlikely regulatory measures, the speculators will be back.

More importantly, the old causes for concern that got another, long overdue hearing during the price rises of 2003-08 remain. Known oil supplies continue to be used up much more quickly than new supplies are being discovered, and the process of getting production up and running at new fields (a decade or more) remain as long as before. No new reason has appeared to think that the reserves of the OPEC countries have not been significantly overstated. The theory of peak oil is no less (or more) valid than it was back in July. And the potential for unconventional oil to fill the gap between supply and demand that peak theorists have long expected to emerge in the next decade is unchanged from what it was not too long ago (10 or 11 million barrels a day, no more).

This makes the question, as I put it in August, not whether the price of oil will drop (as it already has), but how far, and for how long? And when it starts going up again, as it almost certainly will, how far and how long will that go on too? The end of the oil age was never going to be a linear thing, and the worst mistake we can make at this moment is to pretend that things were really fine all along, that the calls for sounder energy policy in the last few years were nothing but hysteria, and abandon conservation efforts and the development of alternative energy sources-the way we did in the 1980s, when R & D and other efforts in this area fell off, resulting in a pattern of underinvestment that set us back decades, particularly in the U.S., but internationally as well.

Those mistakes, which set us up for later difficulties, must not be forgotten by anyone purporting to guess at the future. I only hope they will not be repeated.