The Fear Bubble in Oil
Oil price predictions are getting outlandish again. A Martin Hutchinson article today talks about how a Middle East meltdown could mean oil prices over $300/barrel. Are you f@#$ing kidding me?!!
The "Fear Bubble", as I like to call it, might eventually drive oil up to $120/barrel; or even $150/barrel, but the idea that it would drive it up to $300/barrel is extremely far-fetched for several reasons:
(1) A massive amount of untapped deposits in North America (and across the world) would become extremely profitable over $130/barrel.
(2) Given both the US's heavy dependence on oil and China's increasing dependence on oil, Hutchinson is dramatically underestimating demand destruction. It's more likely that a rise to $160/barrel would push us back into recession, therefore, causing oil prices to fall again.
(3) In some odd event that $160+/barrel oil didn't push us into recession, it would nevertheless become more economically efficient to restructure our economy away from oil. At prices over $200/barrel, we wouldn't even need government subsidies! The free market would try anything and everything to replace oil! This means that our overall dependence on oil would be reduced. While it might not happen over night, it would happen much more quickly than some might believe.
(4) Hutchinson uses an overly simplistic model that does not factor in how the price elasticity of demand would shift towards a much more elastic demand at higher price levels. Oil is only inelastic at the current levels because the substitutes are more expensive and because our infrastructure is currently designed under this assumption. Destroy this paradigm and oil suddenly looks much easier to substitute for.
Overall, I think Hutchinson and others are ignoring the economic context here. It's not as if there aren't numerous options to diversify our economy away from oil. It's merely that there's been little economic incentive to do so, given low oil prices. If oil prices skyrocket, suddenly, the incentives dramatically increase.