The End of a 20-Year Energy Cycle

Following up on our Polyanna post last week, here’s some more Leonhardt:

While Congress is barking up the wrong tree — blaming speculators for high Oil prices — consider this simpler explanation for $100+ Crude Oil:

"The world is now at the end of a 20-year energy cycle. From the
mid-1980s to the middle of this decade, oil prices fell even as the
world economy grew. A barrel of crude cost $68 in 1983 (adjusted for
inflation) — and just $33 in 2003.

How did this happen? The high prices of the early 1980s gave producers
an incentive to take more oil out of the ground and also gave consumers
reason to use less of it. With supply growing quickly and demand
growing less quickly, prices plummeted.

The low prices of the 1990s reversed those incentives. Americans fell in love with Hummers and pickup trucks, and the Chinese and Indian booms were fueled by cheap energy. Oil supplies, meanwhile, weren’t growing so quickly. To top it off, the decline of the dollar since 2001 has reduced Americans’ purchasing power. Without that fall, a barrel of oil would cost less than $110 today, rather than $141, according to Stephen P. A. Brown at the Federal Reserve Bank of Dallas."

Oil will stay expensive until two things happen: the fundamentals of the supply and demand equation changes, and the scarcity psychology around crude oil shifts.

Bottom line: Oil prices will eventually fall as the global economy
cools off. But you can forget very cheap oil — under $30 or even $40
dollars a barrel — until we find a cheaper adequate replacement.


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Previously:
The Costanza Energy Policy: 25 Ways to Drive Oil to $150 (May 29, 2008)
http://bigpicture.typepad.com/comments/2008/05/how-to-drive-oi.html

Source:

Dispelling the Myths of Summer
   
DAVID LEONHARDT
NYT, July 2, 2008
http://www.nytimes.com/2008/07/02/business/02leonhardt.html

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Category: Commodities, Energy, Markets, Politics, Psychology

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Rubin: Economy Facing `Extended Difficulties’

Serious words from Robert Rubin:

"Former U.S. Treasury Secretary Robert Rubin said that the world economy still faces "extended difficulties” from the fallout of the U.S. subprime mortgage crisis and rising energy and food costs.

"It’s possible that it could get better during the course of this year, but it’s far more likely that we will have extended difficulties for quite some time yet if you consider what is happening with housing prices, the price of oil and so much else,” Rubin said today in an interview in Rome.

Record oil and food prices are fueling inflation and choking growth at a time when the fallout from the U.S. subprime mortgage market meltdown has already taken a toll on the global expansion. The Organization for Economic on June 4 cuts the growth forecast for its 30 members to 1.8 percent for this year, the slowest since 2002."

click for video

Rrubin

Source:
Rubin Says Economy Facing `Extended Difficulties’
Alessandra Migliaccio and Flavia Rotondi
Bloomberg, July 1 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJWQydwyeAzI

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