Thursday, October 21, 2004
Energy Consumption Leading to High Oil Prices
The Cyberspace Cafe for Investors (there's a free trial available). We've all seen the high prices at the pump for gasoline, although adjusted for inflation gasoline is cheaper today than when we stood in gas lines. Imagine my surprise when Midas who writes a daily column at the James Joyce Table, quoted Bridgewater Observations.
"In our opinion, without a much greater tightening in both developed countries and China (which we do not think will occur soon), the engine will not be slowed enough to prevent a move in oil prices to over $100 to $120/brl… That is not to say that we do not expect the energy price rise to be more noticeable over the next few months, because we do. However, we do not expect it to have a material impact on either energy consumption or GDP growth."Two questions:
Why not just pump more oil? Bridgewater says Oil production is pressing up against production capacity and the rate of growth in demand is exceeding our abilty to increase production.
How does Bridgewater arrive at $100 to $120 per barrel? It seems that the demand for oil is inelastic. It causes big increases in price to get consumers to change their behavior. Oil consumption today is about 2.7% of GDP. At its peak in the 1980's it took consumption at 8% of GDP to curb demand and interest rates were 16% briefly. It would take oil at $120 for consumption to equal 8% which would curtail demand (and slow economic activity).
On October 13th in Mover Mike I wrote of the relationship between the price of Gold and Oil. It traditionally has been one (1) ounce of Gold buys 15 barrels of oil. Gold at $423 buys almost eight (8) barrels today!