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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

April 29, 2011 at 9:52 AM

Tanked: The razor edge of oil prices in our future

Urbanist James Howard Kunstler recently offered a succinct explanation of rising oil prices in a world where demand is increasing while production and new discoveries have irretrievably plateaued:

You will recall, perhaps, that hoary old concept, the “bumpy plateau” of the peak oil story. This was the idea that the actual tippy-top “peak” of peak oil, studied at close scale, would actually take the form of a raggedy line representing the interplay between supply, demand, and most importantly the frantic psychological response of humans operating in markets. It was clear that economies would stagger under the burden of high oil prices, and economic activity would contract, and people would use less oil and the price would go down. When prices were real low again, people would resume buying more oil (and other stuff) and economic activity would mount and oil prices would go up again. We knew this would happen for a couple-few cycles, and that then things would get… more interesting.

This is not to say speculators are not partly to blame. Kunstler goes on, “The oil speculators are normal characters in a stressed market doing what needs to be done on the margins of ‘price discovery.’ The trouble arises when price discovery occurs in turbulent times and places, for instance, when people in a part of the world called the Middle East & North Africa (MENA, for short), start rioting against their governments, which has been the case persistently for a couple of months now – a region that contains about half the world’s oil reserves.” He rightly laments that while President Obama has gotten worked up about this, “Funny, he didn’t show any interest the past two-plus years in people who make money swindling taxpayers via booby-trapped Collateralized Debt Obligations and Credit Default Swaps.”

It is also true that as part of the deregulation that helped cause the Great Recession, lawmakers lifted serious government oversight of energy contracts and other commodity trading. So speculation is playing a role in gasoline prices, but probably not the dominant one. That won’t keep Americans from magical thinking that they are somehow entitled to cheap gas.

The economy sits in precarious balance regarding oil prices. As the global economy recovers, demand rises and oil prices go up. At a certain point, they slow the economy so much — including the financial bets associated with energy — that demand collapses and oil prices fall. We can’t drill, baby, drill our way out of this conundrum, and we’ve spent precious years doing nothing to address our limited, antiquated transportation infrastructure.

Welcome to the future.

Today’s Econ Haiku:

Amazon’s sorry

As consumers discover

The cloud has some leaks

Comments | More in Energy, Oil prices

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