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Why We Should Worry About Crude Oil Prices


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For the past several months crude oil prices have been difficult to understand. The price fluctuations have been extreme. While moving from a high of about $147.00 a barrel in July 2008, to a recent low of just under $32.00 a barrel, crude oil prices experienced gut wrenching daily volatility. To say that the market have been unusually volatile is an understatement.

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 rate countries like China, India, and Brazil, will keep crude oil market supply and demand closely balanced. Even in the US the economic slowdown has only marginally decreased the consumption of crude oil and refined products. 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 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 forced transformation of the economy that will soon come. The age of cheap easily accessed crude oil supplies is coming to an end. The current low price due to the worldwide deleveraging of debt may help the consumer over the short term but is bad news for the long term health of the US economy as with low prices efforts to decrease America's dependence upon oil imports is relaxed.

While low crude oil prices are generally welcomed by the consumer at low prices the exploration and drilling of new oil fields are being delayed or cancelled. Alternative energy development has slowed as with a low price for crude oil alternative energy resources are not price competitive.

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. This misguided effort will prove to be futile. Resources that would be better used to develop, say rapid rail transit and compact cities, will be wasted in trying to support the culture of the automobile.

Trillions of dollars that the US no longer has will be wasted in this process. We are basically betting our future on being able to keep crude oil prices at yesterday's price level and availability. This is a fools bet that we can not win as within five years peak oil becomes an unpleasant fact of life. The US must quickly adjust to a world of scarce oil resources and create new opportunities out of the energy challenge.
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