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Will Adaptability
Trump Elasticity... Where is Oil Headed?
Bruce Miller, CFP
In a previous article I wrote in June of this year, oil was
selling for $147 a barrel and supposedly headed to $200 per
barrel. In that article I raised the argument of elasticity when
it comes to the price of oil and wrote about how demand would
become the dominant factor in setting the price of oil. Since that
time, the per-barrel price of oil has dropped to $111 per barrel
and news stories focusing on supply issues are nonexistent in the
press. Demand has indeed become the ‘new story’. Surprise,
surprise…the law of elasticity still does exist! Many analysts are
now calling the bottom of this price decline at perhaps $80 per
barrel.
Get ready for another surprise. People are actually putting a very
positive spin on the fact that they were able to fill their tanks
for ‘only’ $3.80 per gallon. It’s amazing how perceptions change
in the span of a few months. Let us call this a new law; the ‘law
of adaptability’. We live in an instant world. We want it and we
want it yesterday. A corollary to that ‘instant world’ vision is
that we also more instantly adapt our behavior and attitudes to
fit a new situation; hence our appeasement with $3.80 gas. The
question then becomes: Is this a good thing or a bad thing? The
answer is, as usual,….it depends.
‘The Law of Adaptability’ may make our appreciation of oil as a
precious resource a mere reasoned blip in our otherwise insatiable
thirst for oil which has resulted in our country consuming 25% of
the world’s oil production. We may well see reversion back to
free-wheeling, gas consuming patterns. Fuel conservation was good
while it lasted folks, but the SUVs, Hummers and RVs are ready to
hit the road again at these bargain basement prices. Elasticity,
while still an important factor will be trumped by adaptability
and price of a barrel of oil will resume its resilient march to
the $200 mark and beyond.
What to do….what to do…
A new energy policy must force us to continue to treat oil and gas
as precious resources. An energy surplus fund should be created
and a surcharge tacked onto the price of gasoline to keep it
expensive. Energy surplus funds could be used to fund alternative
energy research and provide tax credits for gas critical
industries such as trucking. I don’t mind paying $4 for gasoline.
I do mind paying $3.50 of it to Iranians, Venezuelans, Arabs or
Russian suppliers. If we could contain our demand by maintaining
high energy prices we would take control of it and drive the price
of a barrel of oil back to $35 per barrel. The true price of gas
would be back to near $1 per gallon yet we would maintain an
artificial price of $4. Oil producers would get 50 cents per
gallon and the energy surplus fund $3.50. I can live with $3.50
per gallon going back into our own countries resources. Who
wouldn’t want that? Who doesn’t need that?
August
15, 2008
Copyright© 2008 – Bruce Miller - All Rights
Reserved
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