After OPEC agreed to cut oil production and after yet another of the seemingly
ubiquitous fires at an oil refinery, oil and gasoline prices recently shot up
wiping out some of the gains made during the past two years of steadily falling
prices. The $64,000 question is can it last?
First, even should the current price levels last it probably wouldn’t
be such a bad thing. Gasoline prices are still at very low rates compared to
the cost of energy historically.
Second, as The Economist pointed out at the beginning of March, some
observers were beginning to fear that a prolonged low prices would destabilize
governments in places like Nigeria and Iran where oil makes up half of government
income. On the other hand the rise in oil will make it easier for those countries
to put off making the necessary political and economic changes necessary to
become more than one-product economies. Just imagine what happens to those nations
if a viable, cost-effective fuel cell system entered the market say in 2005
(fuel cells use hydrogen for power rather than fossil fuels).
In my opinion, though, the price increase probably won’t last. First,
as the price of oil rises there is more incentive to find more. Just last month
news of a major new oil find off the Gulf of Mexico was announced.
Not to mention that as the price of oil rise so will the temptation to cheat
and break the quotas. Venezuela and others have repeatedly demonstrated they’re
more than willing to put their own interests well ahead of OPEC’s.
My prediction – sometime before 2002 oil will again dip below the $15/barrel
Drowning in oil. The Economist, March 6, 1999.
OPEC agrees to cut oil production. Bruce Stanley, Associated Press, March 23,
OPEC oil ministers want total compliance with production quotas. Bruce Stanley,
Associated Press, March 22, 1999.
The next shock? The Economist, March 6, 1999. OPEC greed. Jay Ambrose, March
There are no revisions for this post.