A Supply Side Problem: Oil's High Price is Here to Stay
by: Frank Maura posted on: August 06, 2008 | about stocks: DBO / OIL / USO
While Wall Street has been concentrating recently on the demand side of oil leading to lower prices, the future conditions of oil prices have been and will be determined by supply side economics.
The fallacy is that a mild to moderate recession in the United States will lead to lower oil demand and thus a drop in oil prices. This is a short-term projection. Even with lower demand in the United States, the growing markets hungry for oil such as China and India will put constraints on supply in the future. Keep in mind that to a degree oil is inelastic. There is only so much lower demand that even a recession can bear. Companies still have to get their goods to their ports. People still have to go to work.
Even with new conservation, supply availability will lead to higher prices no matter what the demand may be. Why? Because many have looked at the demand for oil as if it was a discretionary product. Oil demand will reach a level where discretionary demand gets closer to zero, while the inelastic demand will continue to go up.
The infrastructure for oil is still intact for many years to come. While many talk about wind, solar, and better mileage cars, this infrastructure is many years away. The old paradigm will be with us for many years to come. We simply cannot lower the inelastic demand for oil with the turn of a switch. With supply constraints, oil prices will eventually go higher, yes even with a moderate US recession. Added to the argument is the geopolitical problems which may cause high disruptions in oil supply.
So what is the argument? The argument is that no matter the size of the US recession, no matter the short term infrastructure on conservation measures, no matter the lower discretionary demand for oil may be, the higher demand for the inelastic demand for oil, especially in the emerging economies, will lead to higher prices of oil. The high price of oil is here to stay. |
