A-Jad Right About Oil Prices

Iranian President Mahmoud Ahmedinejad has been on a verbal blitz offensive lately. You’d think he was deliberately trying to provoke the attack he fears on his country. It’s all part of the game, I’m afraid. In order to play effectively, you have to sneak in some truth along with the bluster.

His latest salvo contains some of that truth. He is quoted as saying in spite of the record oil prices, "The global oil price has not reached its real value yet."

A-Jad knows how important crude is. And he knows the economy of the world depends on it. He also knows that China and India are about to engage the west in a bidding war over it. So he’s preparing us for the inevitable price shocks. Ironically, these shocks won’t be caused by limited supply–but by runaway economic growth.

The world has been awash in an abundance of cheap crude for over a century. This tremendous surplus has resulted in global economic distortions of the highest order. Markets can’t work when price information is falsified. Oil production has failed to price in several important factors:

  1. A depletion premium: Knowing that oil reserves would eventually be exhausted, the price should have reflected the cost of an energy transition to renewable forms of energy.
  2. Externalities associated with oil pollution–not only from smokestacks and tailpipes, but from the chemical industry. These health care costs now burden the overall economy. Rising waters from CO2 accumulation could inundate the world’s most valuable coastal real-estate.
  3. Military spending associated with providing continued access to oil from unfavorable regimes. This includes the so-called "war on terror."

A-jad is preparing the west for a future where we pay not only these premiums (which we have been paying already without realizing it), but also where the stated market price is significantly higher. $125/barrel is certainly not out of reach in the next 12-18 months.

At a certain point, oil will cease to be the bargain it now appears. We will rue the day we ever allowed our entire world economy to be designed around this unsustainable commodity.

Bring it on! Let the market guide us in the direction we need. It can’t happen soon enough! This issue needs to be at the forefront of the minds of consumers as they make their purchasing decisions. I only hope the rise is gradual enough to allow innovators time to react without high energy prices pushing the world into economic turmoil.

Comments (One comment)

Aaron Kinney / April 21st, 2006, 12:58 pm / #1

Well said. Let the free market show us where we need to go from here. If oil becomes too expensive, then people will instead direct their money into alternative energy and transportation sources. And in return, the decreased oil demand (due to alternative energy sources) will allow the oil prices to drop again.

The free market is the perfect solution to these kinds of problems.

Since gas is so expensive now, I may have to start taking the Orange line to work again, and that bus line runs on natural gas. Wheeeeee!!!!

Post a comment

Comments are closed for this post.