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Gas Prices and Globalization

A few months ago when oil prices were regularly breaking new highs, I repeatedly wrote about the oil crisis. It is only fair that I similarly acknowledge the recent drop in oil prices. I don’t want to be the sort of person who only gloats when he is clearly proven right, and then hides in a bathroom stall when he appears to be proven wrong.

As I’ve written before, the recent drop in prices is not a sign that the oil crisis (or “peak oil”) was fake or has been avoided. It doesn’t take a habitual pessimist to see that almost all evidence points to an increase in oil prices over coming years, not a drop. Although the current price is the lowest this year, oil still costs roughly four times what it did in 1999. This current dip is merely a short term variation in an overall upward trend.

The main reason for the recent drop is that much fearful apprehension was “built-in” to the market price for oil, in advance. Every possible bad scenario — a worsening war in the Middle East, a terrible hurricane season, increasing tension in Iran — was taken into account before those events actually played out. However, as the summer waned and the turmoil between Lebanon and Israel returned to a simmer, no major hurricanes made landfall, and the Iran situation remained unchanged, investors began to relax and oil prices dropped. But it is important to note that none of these situations were resolved: they just haven’t come to a head yet. All of them will eventually return to the headlines. Sooner or later we will have another devastating hurricane, another war, or some other disaster we’ve yet to forsee, and oil prices will skyrocket again.

Already in recent days the Republican Party seems to be priming the public for a possible withdrawal from Iraq, or at least for open admission of the failure of its policies in that country. The short term repercussions of this move have the potential to wreak great havoc on oil prices, as does any event that threatens to reduce US influence in the Middle East. If the Republican Party is strongly defeated in midterm elections, this may shake things up even further as people begin looking ahead to 2008 and a possible regime change on the home front.

Of course, the key factor that has not changed at all in recent months is the simple law of supply and demand. While demand rises and falls in the short term according to a number of complex factors, and while production levels can be tweaked to some degree by oil producers, the bottom line is that over the coming years and decades the number of countries who need oil in large quantities is growing quickly, while the amount of cheaply accessible oil in the ground is shrinking. No matter how you play the cards, no matter how much you mock people who have the sense to be concerned over the oil crisis, this basic equation cannot change. Piddly oil finds in expensive deep water wells make for good headlines but don’t change reality.

In the short term, I’m glad oil and gasoline prices have stabilized. I want a healthy economy and lower inflation as much as anyone else. In the long term, though, this recent dip — however long it lasts — may prove to be a bad thing. In recent months real changes in mindset were beginning to take place. Climate change is in the mainstream news like never before. SUV sales are down, hybrid cars are in demand, funding for transit is back on the political agenda, and investment in new green energy technologies is way up.

In short, good things were coming out of a bad situation. It would be a shame if this recent short term dip in oil prices caused us to lose this positive momentum. We should be thankful for this bit of breathing room, and treat it as a welcome bonus, not an indication that the oil crisis has been diverted. Now is the time to go full steam ahead preparing for the tougher times that are no doubt still ahead.

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