This week anyone with a car is telling the same story: Where were you when you saw regular unleaded at less than $2 a gallon? (New Market, Virginia, in my case.) People are talking about it like they were Noah catching sight of Mt. Ararat--the flood of high prices is over. Except, well, it's not. According
to a
new report by the International Energy Agency, over the last year investment
in oil and gas exploration has tanked, resulting in a $60 billion shortfall. The
decline in investment is the other shoe in the recent drop in prices--without income,
state-run oil companies, which are expected to account for 80 percent of
investment and production over the next 20 years, are suddenly strapped for
cash. The IEA also issued revised predictions for long-term growth in world
energy demand--slightly lower, thanks to the global economic downturn, but still
frighteningly high: 1.6 percent annual increases between 2006 and 2030, an
almost doubling of current consumption. And almost all of it will come from
developing countries.
This means that, as another, forthcoming
IEA report predicts, oil prices will soon be on the rise again, averaging $100
a barrel between now and 2015, and up to $200 by 2030. To many analysts, dropping
oil prices are simply the result of a burst bubble, resetting to reasonable numbers. And that may be partly
true. Remember that the price-per-barrel is not a direct reflection of demand,
but rather it’s filtered through a market. Expectations of continued demand,
not the demand itself, drove oil prices to unrealistic levels. When it looked
like that demand would drop temporarily, investors fled. But current prices are
unrealistically low, a sort of concave bubble, and regardless of demand they’re
set for yet another correction. In the long run, the brute facts will adhere: dwindling
supply, skyrocketing demand, and a failure to develop a coherent alternative global
energy strategy. If I had some extra cash, I’d be buying myself some crude oil
right now. Sweet, sweet crude.
--Clay Risen