On Kedrosky’s blog todayhe posts that we’re screwed either way oil prices go.
1) oil goes up and our economy is in trouble (eats up all consumers’ disposable income, inflation, etc)
2) oil goes down and alternative energy funded bets don’t make sense.
I think this is crap. Paul’s right from a historical perspective: after the oil embargo of the 70’s, one would think we would have realized that making ourselves beholden to an unstable region of the world that doesn’t have a lot of love for America is probably not a winning strategy. But as soon as the crisis passed, as a nation, we stopped doing all the things we seemed so committed to previously (improved fuel standards for vehicles, conservation, fuel alternatives, etc). Stupid, stupid, unforgivable strategy. So looking at that, you’d say if oil drops #2 comes to fruition.
But I have to believe that we’re in a different world today. If oil were to drop, alternative energy will still thrive. Here’s why:
1) The notion of danger coming from the Middle East is burned into everyone’s mind. Supporting regimes (Chavez, Iran, etc) that are hostile to the American gov’t is becoming a generally accepted bad idea.
2) The amount of money that flows out of the country to fund oil (as well as crap from Asia) is likely nearing it’s breaking point soon. Stopping this huge outflow of cash has to stop.
3) The almost certain to continue to fall dollar will provide a floor underneath oil prices.
4) China, India, et al coming online as growing and hungry fuel consumers will change the dynamics of the market for the long term.
5) Climate change has enough mindshare that it plays into fossil fuel usage regardless of price.
I say that this time is different. Prices go down, oil!
Oil prices may fluctuate up and down over the short term, but the reality is that they will keep going up as a trend. We have reached or surpassed peak oil and as consumption increases (especially from countries like China), the supply will become ever diminishing and the price keep creeping higher.
People need to realize that the era of oil is fast coming to an end. The oil and auto makers know it. You can already see how they are moving to alternatives in a methodical and gradual fashion that will continue to mean the demand for oil (although in a decreasing curve) while alternatives get better and cheaper. Don't kid yourself – they know what they are doing.
The public seems to be the only ones who have no idea what is going on.
Oil prices will never drop more than a correction or fluctuation as they climb year after year.
Oh – I forgot – on point #1 – that increasing oil prices eat up all consumer's income:
While increasing oil prices will definitely have a negative impact on the economy in the short-term, in the long term investment in new technology and alternative energy will allow the economy to recover. Individual consumers will have to make hard choices to change their lifestyle or they will be in fiscal trouble. Parking that truck or SUV and driving a compact or using public transit or other methods will be one of the answers. Look at how compact cars suddenly became popular during the 70's oil crisis, but how we reverted back to huge cars, trucks and SUV's after it passed. People will change if they need to. When oil prices go up enough that it really starts to hurt, they will make adjustments – albeit grudgingly.