Oil Prices and Scarcity

At the point of writing, oil prices are almost shooting past $100 per barrel. People around the world hold with bated breath to see if there are any record to be set. More people whine and grumble about the high prices.

But the high prices of oil signal the possibility of 3 things. One, supply of oil is becoming scarce, really scarce. Two, there might be an endless supply of oil down there, but suppliers cant pump them out fast enough. Three, price uncertainty of oil in the future, is causing speculators to buy more oil.

If supply of oil is really scarce, high prices will stay high, and there will incentive by firms to looks for cheaper alternatives. By now, alternative energy sources should be starting to look cheap. There will also be incentive to use energy more efficiently. All of which is good news, because it means environment is finally punishing us for overly rapid economic growth.

If suppliers cant pump out oil fast enough, then there is incentive for firms to look for more efficient means to pump the oil faster. Unfortunately, oil fields are controlled by the few, and thus the rather high barriers of entry into this market. Still, in this situation, either prices stay high, and force people to switch to alternative/more efficient means, or prices come down. Both of which are good news.

If speculators are the main culprits, then we can safely say that this situation is unsustainable. Sooner or later, the price of oil is about to fall, sharply.

We should not whine over high prices of oil. Price signals tell us to move our butts, and we better move our butts.