oil prices

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1. Oil prices

   Well, we’re having a much longer discussion similar to this one. Here is some required reading for understanding the problem:

   1. The Peak Oil phenomenon. This is a theory that, essentially, oil is a limited natural resource, and we will reach a point where supply will begin to diminish despite our best efforts. If demand is not mitigated before that point, a worldwide energy crisis will result. I am of the opinion, though, that rising prices will have mitigated demand long before.
   2. The exchange rate of US currency. I allege that the Fed — our nation’s version of a central bank — has carried out a monetary policy mandated by the Congress of devaluing the dollar in order to more easily repay our national debt, among other things. The Fed’s repeated lowering of the interest rate has exacerbated the falling dollar value, and the dollar is now trading at 50% of its previous value. That, alone, is responsible for a major portion of the rise in oil prices. The Fed can reverse this at any time by raising interest rates, which they will only do to head off inflation.
   3. Tension in the Middle East and West Africa has fueled “speculation” in oil futures. Calling it “speculation” on such a large scale, though, is akin to calling your purchase of gasoline to fill your tank for the next week “speculation” at the filling station. I’m not certain how much of the price rise is due to expectations of higher prices in the future, but it appears to be mostly demand-based.

   Of these, the last factor is actually the SMALLEST factor driving oil prices. And this is why it bugs me that many major political figures are blaming “speculation” for high oil prices. It’s demand coupled with a falling dollar. A rising dollar would mitigate this trend, as would increased extraction of oil.

   I hate using the word “production” for oil. We’re not producing anything… we’re just drilling for it and sucking it out of the ground. Unlike the water table, those reservoirs don’t appear to be refilling quickly, if at all.

   —
   Matthew P. Barnson

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