Saturday, October 30, 2004
In the article Art Smith of John S. Herold
thinks higher-than-usual prices are needed to moderate consumer and industrial demand and to spur enough new drilling to give oil markets a bigger supply cushion.On October 21st I wrote that some like Bridgewater are warning us of $100 to $120 oil
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.I think the article in The Oregonian is much to cautious and we should be preparing for the consequences of much higher oil prices.
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).