Demand for Oil

Confusing article from Business Week The Oil Paradox - A worldwide slowdown won't end the oil price boom anytime soon. The article title and 90% of the article suggest that oil prices will stay high for a while. The reason is old fields being depleted, lack of exploration for new fields, and some governments deliberately restricting supply of oil to keep the price of oil high. Then at the end of the article, say last 10%, is something like a "But" statement, that is 100% opposite of the first part of the article. The argument here is a global downturn may decrease demand for oil and increased usage of alternate fuel may result in lower oil prices.

Thomas Friedman has argued that the higher oil price is actually helping the US by increasing the R&D into alternate fuels, and even if the price of oil falls the US should keep it artificially high to continue the development of alternate fuels.

My 2 cents.

Alternate fuels in the next 4-5 years besides getting huge tax subsidiaries for Ethanol, are not going to have much of an impact on oil prices. Price of food - yes. If the US started importing Ethanol from Brazil without tariffs, I would have a different answer, but I don't see this happening due to politics. Oil demand from China and India is increasing. Especially China that is having more and more cars as well as demand for diesel due to generators needed due to problems with their electricity producing infrastructure. China is building more nuclear and coal plants, but demand is still outstripping supply. And recently China went from being an exporter of coal to being an importer. Solar powers price is decreasing, but not fast enough to be truly competitive yet. Estimates are for peak utility costs by 2010 and bulk is a ways out. Fuel efficiency such as hybrid cars in the US won't substantially reduce usage of oil in the US in the next couple of years.

The current increase in oil prices is also due to a war premium being caused by Iraq and Iran, lack of investment in new oil fields, oil future trading, and increased demand by oil by China and India. Iran is not getting new equipment due to embargo's of technology that are impacting production. Saudi Arabia is not funding yet needed to replace their older fields and increase production yet. Oil producers are also increasing investment in local industry that is a heavy user of energy as a way to diversify their economy.

My guess on the price of oil? My guess, and it's a guess would be down in the near term as the US economy recovers from the deflating of the property bubble that has increased consumer spending.