Why We Should Worry About Crude Oil Prices
During 2008 crude oil prices were difficult to keep up with. The price fluctuations were extreme. While moving from a high of about $147.00 a barrel in July 2008, to a recent low of just under $37.00 a barrel, crude oil prices experienced gut wrenching daily volatility. To say that the market has been difficult to trade is an understatement. 2009 looks to be more of the same. For crude oil there is little hope of near term price stability. The worldwide financial market meltdown has contributed to a slow down in oil demand as economic activity decreases. This slow down in demand is offset by a continued decline of crude oil production at the world's major oil fields. The long term growth in oil products demand in high growth countries like China, India, and Brazil, will keep crude oil market supply and demand closely balanced. This will keep crude oil markets extremely volatile as small changes in supply will have a large effect on price.
Oil exploration and production projects have been cancelled or postponed due to current relatively low crude oil prices. Interest in alternative energy projects have decreased along with the fall in the price of oil. These events are setting the stage for another price explosion within the next couple of years.
There is little realistic hope that at any time in the foreseeable future any combination of alternative energy sources will be able to replace the dependence of the developed world upon oil as the prime energy resource. While American politicians talk of America becoming imported oil independent within ten years that goal is all but impossible to achieve. Even with an intense effort alternative fuels can not replace crude oil as an energy source in time to prevent demand for oil far out pacing supply. We are at the end of the cheap energy era that has fueled high growth rates in developed nations.
Without ample low priced crude oil supplies there is little realistic hope of restoring the world economy to the growth model that was desired prior to the run up in energy prices. In the United States a world leading powerful economy was built on the back of cheap energy supplies, especially crude oil. Crude oil is the raw material input for so many products, like gasoline, jet fuel, and plastics, that scarcity and high prices will lead to a complete transformation of our consumer driven business model. The American model of driving great distances from houses in the suburbs to businesses in the cities, with huge shopping malls in between, will soon be viewed as one of history's great mistakes of economic development.
America is not nearly prepared for the transformation of the economy that will soon come. The age of cheap easily accessed crude oil supplies is nearly at an end. Even the current low price due to the worldwide deleveraging of debt is bad news for the long term health of the US economy.
While low crude oil prices are generally welcomed by the consumer an unhappy fact is at low prices the exploration and drilling of new crude oil fields are delayed or cancelled. In addition, alternative energy development slows as with a low price for crude oil alternative energy resources are not price competitive. And worse of all the need for energy conservation is soon forgotten as the public people thinks that they have somehow dodged a bullet and that it will not be fired at them again.
Present low prices for crude oil are setting the stage for the next price bubble for this finite resource. US government measures will try to sustain the unsustainable and divert declining financial resources into trying to prop up the American automotive and suburb centered cheap energy based consumer economy. That is, resources will be wasted in trying to restore the past way of living when an entirely new model will be needed to survive and prosper in an energy starved world. Trillions of dollars that the US no longer has will be wasted in trying to do business as usual. We are basically betting our future on being able to keep crude oil prices at yesterday's price level and availability. This is a risky bet that we can not win as within five years peak oil becomes an unpleasant fact of life and oil prices move to new highs. The US must do its best to adjust to a world of scarce oil resources and create new opportunities out of the energy challenge or living standards will drastically decline.
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