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David Victor writes in Newsweek:
A worldwide slowdown won't end the oil price boom anytime soon.
Last week brought fresh evidence that the U.S. economy is slowing and may have slipped into recession. The news has not only dimmed expectations for world economic growth, but it has also hammered oil prices, which lost $15 from the $100 high just a month earlier. A year ago, more bullish thoughts lifted oil prices from the $50 level in January 2007. The question on policymakers' lips is whether a worldwide slowdown will bring an end to the boom in demand for oil and drive prices significantly lower. Although oil prices will eventually drop as new sources come online and biofuels and other alternatives take hold, crude price are likely to remain high and volatile for a while.
...A big part of today's high prices—and why they are still nearly double the level of a year ago, despite dark economic news—is that oil beats to backward economics. When the price of soybeans or steel rises reliably, farmers and steel millers boost output, and prices abate. When the price of oil rises, many suppliers do the opposite. This bizarre response comes not from the Organization of Petroleum Exporting Countries (OPEC), which is always in the news, but from the pernicious ways that oil wealth ripples through the societies that have most of the oil.
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The rising spiral in oil prices will eventually abate. Some of the relief will eventually come from new supplies, but the big surprise may be in demand. When prices stay high, consumers eventually start investing in more efficient oil systems. And entrepreneurs also look for substitutes such as advanced biofuels that are just being tested on a commercial scale this year. If America's economic troubles spread gloom across the globe, then demand will dampen further. And the trip down from today's dizzying oil prices could be faster than most people think. Once investors in oil commodities are no longer confident that oil will always be more valuable tomorrow than it is today, they will switch their money to some other investment.
Victor is a law professor and director at Stanford’s Program on Energy and Sustainable Development, as well as an adjunct senior fellow at the Council on Foreign Relations.
Author
- David Victor
- Stanford Law School
- David.Victor@stanford.edu
- 650 724.1712