Beutel really got my mind around the concept of the teeter totter.
I had believed and stated here a number of times that "1973 was the rule and 1990s were the exception to the rule." I am shifting to something similar but different in some important ways. 1973 is the rule (actually the late 1960s) in that it really marked the tipping point for us as a domestic supplier of an important percentage of our own demand. From that point on we became more of a passenger than a driver in the energy universe and more at the whim of forces like OPEC and the various commodity exchanges. But, as Beutel pointed out there is no real rule or exception to the rule where price is concerned.
In a free market, particularly a global market, a commodity like oil faces a lot of whims. Some of that is artificial, such as OPEC artificially restricting supplies in 1973. Some of that is natural like an increase in honest demand from countries like China. Some of that is both artificial and natural, like the market overreacting to political unrest, etc. the way traders do. Fear and following the herd, etc.
But, long term, gluts create fundamental reactions that have longer term implications as do oil shocks on the opposite side. For example, all sorts of new production is coming on line now to meet demand, driven by profits and investment capital. At the same time, high prices are impacting demand, and setting in motion changes that will begin to be felt a few years down the road. We will see more economical vehicles, behavior patterns that have been ingrained will start to change, and if we do enter a world wide depression then demand will certainly fall.
As demand starts to fall, there will be a natural overlap in surplus leading to a glut. But the changes already underway will continue for some time so the glut will continue. OPEC countries will try to stay unified and control production to limit supply and increase profits, but there are too many players and cheating can be common. Gradually investment in new production will taper off as the money goes elsewhere. Underperforming wells will be shut down. Research into exploring deep ocean resources in the Gulf will taper off (a lot of potential oil but a lot of expensive R&D to eventually get it). Tar sands and biofuels will become very bad investments and, therefore, will die off. The same market fears that push oil to $110 (beyond the impact of the weak dollar influence) will push oil to an artifically low $10 or $20 say. Oil is bad for your prortfolio --run away, run away!
Then, eventually, demand starts to ramp back up and we find ourselves suddenly (relatively speaking) in another oil shock -- to use the term loosely. Perhaps there is a major disruption of some sort to set the cycle in full motion. The difference between a glut and a shock is quite small. The effort to balance supply to demand generally gets things pretty close. Even as world-wide demand increases world wide production works to match that demand -- but not much more. So relatively small shifts can have a major impact at the pump for long periods of time. The next small shift the other way produces the same result. Equally unfortunate (of fortunate in the good times), such small shifts can have a major impact on our national and world economy.
The best thing we could do to add stability to the process would be to keep driving the hybrids and econoboxes once the prices plummet. But, we won’t do that.
As a side note, we are transferring tremendous wealth to the Middle East, but given the sorry state of our oil reserves (even with the drop in the bucket that is ANWR) we don't have much choice at $10 bbl or $100 a bbl.
Charon
