Several months ago, I made a post elsewhere wherein I was absolutely wrong about something. My prediction was that the U.S. economy couldn’t handle prolonged oil prices at $50 or more per barrel. I did not believe that a nation full of financed SUVs, commuting through sprawling suburbs could handle gas in the $2.50 to $3.00 per gallon range for very long. Optional Spending would stop. The only thing that might prevent serious inflation for the cost of all the goods we ship by truck would be the fact that slowed spending would force retailers not to raise prices lest they lose even more sales. All of this slowdown in spending and reduced margins would lead to layoffs. Rinse. Repeat. And you’ve got another recession.

So far, it appears as if I’ve been dead wrong on that one. We are seeing some inflation. We are seeing a bit of a slowdown in the economy, but we seem to have a lot more ability to absorb the increase in the price of oil than I had thought. This may still change when winter rolls around in the Snow Belt and people see a possible doubling in their usual heating bills on top of the increased commuting cost.

One thing that I predicted in this scenario has come true. Prolonged expensive oil would restart production in areas where the high cost of extracting oil meant that it wasn’t profitable when it was only selling for $30 per barrel or less. I read an article in the Christian Science monitor this morning that, I think, puts the lie to one of the current myths of the mainstream left. It is widely believed that the decline of oil availability is going to force green and sustainable energy into the forefront of our economy. I’ve never believed that we’re anywhere near as close to the end of oil as the fashionable punditry would have us believe. We’ve seen “deadlines” where oil production couldn’t keep up with consumption come and go many times over the last 30 years. The predictions have always been wrong, largely because new technology finds a way to find oil that was hidden or tap oil that we couldn’t get our hands on previously. I think we’ve got at least a couple more decades of that process on tap before we run out. But even if you accept the premise that we’re about to run out of oil, the economics (and to a very real extent the ideology) of the oil business isn’t going to lead us into biodiesel and hydrogen cars. I think the Monitor article makes a pretty compelling case for the notion that we’ll just see other fossil fuels converted into synthetic liquid fuel to fuel our cars, home heating, etc. These fuels easily become profitable when oil is selling above $40 per gallon. At best, in the short term (like the next decade or two) some of these green technologies will make us more fuel efficient. We may get to where we’re getting 60+ MPG, but we’ll still be burning up lots of that light, sweet crude. We may see another 25 years of rising domestic demand.

This entry was posted on Thursday, September 22nd, 2005 at 11:25 am and is filed under economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.