Remember all those Green arguments a few months back about us not needing to build anymore roads as we could not afford to run vehicles on them any more?
This is an interesting perspective from Dominick T. Armentano that a reader just sent through. The source is here.
When LewRockwell.com published my article, “The Coming Collapse of Oil Prices” back in May, crude oil was selling for roughly $135 per barrel. Almost every oil pundit was then predicting that prices would soar even higher. I strongly suggested, however, that prices would likely fall sharply, probably into the $80 dollar range. Well, since then the price of crude oil has declined sharply and (absent some new Mid-east war) they are likely headed even lower in the weeks and months ahead.
My thesis about the near-term direction of oil prices was that declining world demand (due to near recessions in several national economies) and generous profits associated with oil production would inevitably lead to sharply falling prices. The long 150-year history of oil prices is that short-run increases in price are (almost) ALWAYS followed by just as dramatic reductions in price. This scenario has played out in the late 19th century, during and after World War 1, World War 2, and most dramatically after the price hikes of late 1970’s and early 1990’s. Oil prices first increase sharply, then the tumble.
The only apparent exception to this almost Iron Law of Oil Prices is the period 1933–1941, when real oil prices (adjusted for inflation) increased sharply and stayed uncharacteristically stable for years. Yet the proximate cause of that period of sustained high prices was government regulation, not the free market. During the Great Depression, several oil producing states (led by Texas) placed quotas on oil production (pro-rationing) and the federal government cooperated by initiating tariffs and quotas on imported foreign oil. In short, government regulation subverted normal market forces and politically savvy producers benefited artificially at the expense of consumers. Thus, this episode became the exception that proves the rule.
Current oil market pundits, of course, were convinced that this time around the oil barrel, things would be very different. We were told repeatedly that the world was “running out” of oil; that oil production had “peaked” and future supplies must fall; that we were hopelessly “addicted” to oil (our President and both presidential candidates asserted this); that higher prices would not curb consumption substantially; and that the oil industry was not “competitive” anyway and would simply not allow prices and profits to fall...ever. All of this, of course, was (and is) dangerous nonsense, belied over and over again by economic theory and the facts of history. Yet these notions have now become “conventional wisdom” and policy makers employ them in order to subsidize and regulate energy markets regardless of common sense or cost.
I experienced some of this nonsense first-hand shortly after my op/ed appeared. I’ve written hundreds of op/eds over the years but few sparked more of an email assault than that one. Letters came from here in the U.S. and abroad, from businessmen, teachers, financial analysts, and even from local legislators, instructing me that I was either an idiot, a shill for the oil industry, or likely both. I was told on the best authority that oil prices were going straight to $200 per barrel, and then even higher, and that any talk of lower prices was, well, idiotic. Yet when I challenged one alleged oil expert to a Julian Simon-style wager that oil prices would be lower (in real terms) ten years from now, he never replied. My guess is that he is currently risking his clients’ money, not his own, on the near-term prospect of $250 oil. Good luck.
Could currently falling oil prices increase again? Of course. And one of the new reasons, ironically, might be that the “alternative energy” crowd now requires higher and stable oil prices in order to make energy alternatives economically viable. So I’ll be interested to see whether Nancy Pelosi and Harry Reid (or even Sen. Obama and John McCain) might be willing to support a government “floor” on crude oil prices in order to promote the development of solar and wind energy. Stay tuned.
