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« Iraq Liberation Act: 10th anniversary celebration - 29 | Main | Phils are champs! »

October 29, 2008


David Holliday

Demand yes but promises of future production more so. I’ve pointed to the article by Martin Feldstein published in the Wall Street Journal in July before. Here's the link

There have been two major moves down in oil prices since the peak and they correlate directly to events reducing barriers to increased oil production in the United States. The first move was from around $145/barrel to $100/barrel and occurred after President Bush rescinded the Executive Order establishing a moratorium on off-shore drilling. The second was from around $100/barrel to $65/barrel and occurred after Congress didn’t extend the off-shore drilling ban legislation.

Martin Feldstein nailed it in his article. The rise in oil prices was extremely disproportionate to the rise in demand. The driver wasn’t immediate demand but future expectations of oil supply. Mr. Feldstein’s explanation is the only explanation that holds up over the entire bubble including the continuing fall of prices in the face of significant production cuts by OPEC.

People of this country need to understand that this oil crisis was largely self-inflicted. The policies of cutting off domestic oil production created an artificial deficit in future supply that allowed the oil producing countries to take advantage of our stupidity. The price we paid was $145/barrel oil and a serious damaging of our economy.

jj mollo

There is no doubt in my mind that price is affected by demand. The question is whether demand is affected by price. IMO the reason that demand has decreased is only because the economy has contracted -- all over the world. And that's why prices have come down. It might be that the economy has suffered because of the high price of oil. Most likely, though, the economy was getting ready to contract, and the high oil prices just pulled the trigger.

Price must at some level affect demand, but, in the case of oil, over a longer period of time and probably at a higher pricepoint than we have seen so far. Remember though, OPEC will also have something to say about falling prices. They will try to suppress production in order to maintain their price. If we want to fight back, we need to artificially maintain the higher prices -- high enough to put pressure on demand.

The crisis was certainly self-inflicted, but the bad policy at issue was failing to implement an energy diversification strategy over decades. Suppressing our own production may, in the long run, turn out to have been a wise move, even though it was mostly motivated by Nimbyism. We'll have some oil left when it's gone in Saudi Arabia.

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