Oil, Oil Everywhere

One good thing that has probably come out of the economic crisis is the end of King Oil. Last year, for whatever reason, we had a tremendous spike up in the price of oil and gasoline. Now, considering the fact that oil remains plentiful, this price spike may have been caused by speculators or it could have been a reaction to short term supply and demand. It really doesn't matter because it was high enough and fast enough to add fuel to the fire that led to the deep recession that had probably already started and has made most Americans rethink energy usage.

As we start to see the economy recover, we are not seeing the spike in oil demand that some expect. Now, some say this indicates the recovery is weak but there is another potential answer. After the oil shock, we have seen more and more Americans start to conserve energy use, including leaving McMansions, buying more fuel efficient cars and considering alternate energy sources. We have also seen industry move in the same direction.

Now, is oil usage going to suddenly decline to zero? Of course not. However it should be noted that every time someone uses less gasoline or get a better mileage vehicle, improves energy efficiency or switches to a non oil based form of energy, whether it is coal, gas, solar, wind or nuclear, this is a reduction in oil demand that is gone forever. So, even if the economy was to return to pre-recession levels, oil demand will be less than it was.

Now the other impact of the price increases was an increase in oil exploration and quite a bit of success in finding additional oil supplies. Now, some of the new supplies will take awhile to get to market, but considering the fact that commodity prices are quite sensitive to short term trends, any increase in supply with a decrease in demand can have a disproportionate impact on oil pricing.

So will oil prices spike? In the world of commodities, and especially oil, spikes are easily created based on speculation, rumors or short term factors. However, considering all the programs designed to reduce oil usage via use of other energy sources, more fuel efficient vehicles, and overall better energy usage, the supply of oil will exceed demand on a long term basis. The real problem could be that oil goes so cheap that it makes the use of other energy inefficient. However, considering the environmental issues that are more prevalent than they were in the 1980s, it is hard to imagine we are going to relive that part of our history.