The Blog

The Oil Problem

The new $50 oil is here to stay; there's talk on the street of $80 per barrel. What next?

11:00 PM, Mar 14, 2005 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

Fortunately, markets--even the cartel-ridden oil market--eventually work their will in three ways. First, sustained high oil prices will sooner or later encourage oil companies to step up the exploration activities they have long deferred in order to increase payouts to shareholders. Second, the premiums paid for light, sweet crude oils will get so large that refiners will find it profitable to invest in facilities to process more abundant, cheaper oils.

Finally, continued high oil prices will once again persuade consumers to cut back their use of gasoline and fuel oil. Gasoline prices have passed the $2 per gallon mark, a bargain by high-tax European standards, but a price that gets the attention of America's drivers. It will take time for them to react, as the current stock of automobiles will last a long time. But react they will, as they have in the past. It is no accident that America now consumes far less oil per unit of GDP than it did in the good old days of $3-per-barrel crude oil.

Until those adjustments occur, however, consumers will have to look to the supply side for relief. And my guess is that they will be looking in vain for a good while.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.