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[Russell Kanning]

The Coming Collapse of Oil Prices

by Dom Armentano
by Dom Armentano

         
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Bold economic predictions are dangerous, and I've been wrong before, but here goes: Oil prices are about to tumble.

There are several important reasons to believe that crude oil prices of roughly $130/barrel are simply not sustainable. The first is that world-wide economic growth, and hence the demand for crude oil, has slowed markedly due to the credit crunch and the bursting real estate bubble. The second reason is that the Federal Reserve has finally decided to stop lowering interest rates and/or creating credit as if it were the Tooth Ferry; a stronger dollar will mean lower oil prices. Third, the already record high crude oil and gasoline prices have created strong incentives for consumer and business conservation and that has lowered overall demand.

Yet the most fundamental reason to expect prices to fall is that the gap between the price of crude oil and the cost of producing it is just way, way too large to be sustained long-run.

According to the Energy Information Administration, the average cost (in constant dollars) of finding, lifting, and storing onshore domestic and/or foreign oil between 1980 and 2004 has been approximately $20 per barrel; between 2004 and 2006 that average cost rose to approximately $25 per barrel and is slightly higher now. (The cost of producing offshore oil is more than double onshore costs). Yet the price of crude oil has risen to approximately $130 per barrel (doubling in the last year alone) creating large profits for most producers and integrated oil companies.

Marginal suppliers around the world with costs above $30 per barrel but still far below current prices now have overwhelming incentives to uncap wells, engage in secondary and tertiary techniques to recover more oil from existing wells, drill additional wells, and otherwise expand production. (Houston is currently booming with oil production investment as is Brazil). Any serious output expansion will take time but the increasing supply coupled with lower demand will lead inexorably to lower prices; indeed, sharply lower prices.

To be sure, speculators have helped bid up the price of crude oil. Most of the speculation centers around legitimate concerns about "supply disruptions" and some wider war in the Middle East Gulf region. My guess is that roughly 20% of the current price is a supply disruption premium while another 10% is associated with our own debasement of the currency (the dollar) by our own central bank. (This can be proven by comparing oil prices in dollars with oil prices in Euros). When (if) these speculations prove unwarranted, oil prices will decline sharply into (my guess) the $80 per barrel range. But if we get a new war, all bets are off.

Public policy can encourage this bursting bubble scenario. The Democrats want to tax the oil companies or use the antitrust laws against them. Big mistake. More taxes get you LESS oil and "concentration" in the oil industry is not really the problem. The on-going Congressional hearings "investigating" oil prices and profits is a charade and is purely political theater. The very same federal and state governments that complain about high oil prices continue to tax gasoline at a rate (40 cents per gallon) far higher than the profit rate for the oil companies. So much for government concern about consumers.

On the other hand, public policy can and must change to allow energy companies to explore for and develop domestic and offshore supplies of crude oil. Obstacles to expanding and building new oil refineries domestically must be removed, and quickly. Alternative energy sources, if they are cheaper, must be allowed to proceed (including and especially nuclear) but direct subsidies to ALL energy companies (including to oil companies, if any) should end. We need the contributions of wind, solar, etc., but only if and when their real costs and prices are comparable with oil and natural gas. Competitive energy suppliers will work to produce in our interest if we free up the markets and let them.


May 26, 2008

Dom Armentano [send him mail] is Professor Emeritus at the University of Hartford (CT) and the author of Antitrust and Monopoly (Independent Institute, 1998) and Antitrust: The Case for Repeal (Mises Institute, 1999). He has published articles, op/eds and reviews in The New York Times, Wall Street Journal, London Financial Times, Financial Post, Hartford Courant, National Review, Antitrust Bulletin and many other journals.

Copyright © 2008 LewRockwell.com

[Kat Kanning]

ZIHUATANEJO, Mexico

[Russell Kanning]

Take It Easy on Me

[Jim Johnson]

get back to work...

[J’raxis 270145]

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[Russell Kanning]

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[Tom Sawyer]

2C-I

[dalebert]

OMG, Roger. I'm so used to your avatars of William that I didn't notice until just now that gigantic stream of water! LOL

[Lloyd Danforth]

http://www.comics.com/comics/soup2nutz/

[Tom Sawyer]

OMG, Roger. I'm so used to your avatars of William that I didn't notice until just now that gigantic stream of water! LOL

He was using the hose to fill the pool and thought it would be funny if he was a "fountain".  

[Eli]

Proximity Relevance Decision Making (PRDM).

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[Nathan.Halcyon]

Libertarians Pick Barr as Presidential Nominee    or     or   

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As for my clipboard, I recently redistributed this to a fellow pidgin user: http://www.funlol.com/7943/Getting_Owned%21.html

[Kat Kanning]

http://www.youtube.com/watch?v=ik8jICj8juc

[Jim Johnson]

Sudoku-playing jurors halt trial 

One juror said the number puzzle helped keep her "mind busy".
A drugs trial has been abandoned in Australia after several jurors admitted they had spent much of their time playing Sudoku in the courtroom.

Judge Peter Zahra aborted proceedings after the jury forewoman admitted she and four others had been playing the popular puzzles to fight off boredom.

The problem was discovered when some of the jurors were observed writing notes vertically rather than horizontally.

Sudoku involves completing a grid of numbers in the correct sequence.

The three-month trial had cost taxpayers more than A$1m (US$945,000) and the two accused men faced possible life sentences.

Copious 'note-taking'

One of the jurors explained that the puzzle had helped keep her "mind busy" as she listened to repeated testimonies from the witness box.


HAVE YOUR SAY The right to be tried by a jury of your peers is a fundamental human right. To abdicate those freedoms and duties because it is boring is pure selfishness
Andy, USA
Send us your comments"Some of the evidence is rather drawn out, and I find it difficult to maintain my attention the whole time," the juror told the Australian Associated Press.

Lawyers had presumed the scribbling they could see jurors doing was note-taking.

"We actually all thought they were quite a diligent jury," lawyer Robyn Hakelis told ABC local radio.

"The judge had made many comments about what a good jury they were, how they were taking copious amounts of notes."

There is no legal action that can be taken against jurors for doing puzzles during a trial, so they will face no penalty for their behaviour.

A fresh trial is expected to begin in a few weeks, once a new jury has been called.