Earlier this year we watched oil take a roller coaster ride up to $150 but it’s now plummeted to less than half that.  At first we were told it was simply supply and demand establishing a fair value.  We are now fairly certain it was the speculators, which, thanks to new rules, have been mostly removed from the game.  However at some point supply and demand will establish a fair value for oil again, and many believe that to be around $100, The Weakonomist included.

The run up to $150 was marked with estimates of $200 by year end.  Those estimates are showing to be wrong and have all likely been retracted.  Why then do we continue to estimate?  For one thing it’s fun and for another this time the estimate is much more polished.  The $200 game was based on growth models that had no real relevance only the truly fearful (the 25% that still support George Bush) actually ever believed them.  This time $100 makes sense.

When I made my predictions for the end of the year, I settled in on $100 oil and $350 gas.  My guesses were based on my belief of overpriced oil but also that $50 oil was a thing of the past.  However I now want to retract my bid of $100 by the end of the year.  This is because as a population we have actually reduced our use of oil.  I never expected it to happen, but I’m so proud.  I already drive like I’m stuck in 2nd gear anyway so I didn’t change my driving habits much.  It would seem enough of you did.  Based on horrible truck and SUV sales I’d say those folks that downsized have helped us most.

I’m changing the timing of $100 oil from end of 2008 to our economic recovery.  So instead of using market turmoil and recessions in my timing, I’m saying that once we recover expect to see $100 as a standard.  As long as we’re in a slump, I don’t see any reason with $75 oil and sub-$3 gas at the pump being reasonable.  But, once we recover our demand for the good stuff will only increase again.  With new measures for fuel efficiency and an aging population of boomers that will commute less, I see a flattening of prices over the next decade.  This is not to say we won’t see $200 a barrel in another crisis, but it won’t be normal.  The Financial Times is reporting that the International Energy Agency is predicting something similar.  They take it one step further by putting in $200 for the norm by 2030.  That sounds about right, but inflation adjusted, isn’t all that different.

The IEA fails to point out that $200 worth of oil in 2030 will get us much further than it does today.  Improvements in efficiency and the introduction of other technologies for transportation will mean the price of oil will cease to be used as a barometer for the modern world’s economy.  Just like the daily changes in silver and coffee are simply unimportant, so will oil.  Don’t get me wrong we’ll use oil for the next century, but even the daily changes in the price of coal don’t matter to us anymore.

So we haven’t seen the last of $100 oil, but we might have seen the last time we cared.

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categories: business, economics