Oil’s Vicious Circle

06/19/2006

Paul Munnis

As petroleum products rise in price then alternative energy solutions suddenly become feasible. An example is Ethanol. As people start to use the alternative energy source (ethanol) then petroleum oil products become surplus and their price falls drawing consumers back to the cheaper oil solution.

But then the alternative energy supply becomes surplus and its price falls. As consumers switch from one to the other it has the effect of capping the price of petroleum products, something the oil industry wants to avoid.

The Bush Administration is a slimy product of the oil patch. They might talk the talk of alternative energy but you can bet they won’t walk the walk unless they can get a monopoly on the alternative energy product for a client oil company.

This Sundays interviews on Meet the Press made it clear the major oil companies do not want to see alternative energy arrive. You can bet OPEC feels the same way. In fact just the threat of alternative energy investment may be enough to lower oil prices.

Meantime oil speculators are a major problem. If Congress ever did want to do something about oil price all they need to do is pass a windfall profits tax for people trading in oil futures. That would knock about a buck a gallon off of oil prices.

Have you noticed the tie-in to foreign policy?

When oil prices are low, all of the mid-east wants to be friends of America. When oil prices get high they all want to rattle sabers against us. Consider Iran right now. If oil dropped back to $38 dollars a barrel do you think they would want to risk UN sanctions? I don’t think so. What if, as a result of sanctions Iran finds itself unable to sell through the spot market? My guess is it would accelerate more alternative energy solutions, customers would switch, Iran would have a heck of a time ever getting its markets back. Other oil suppliers would want to keep Iran out forever because allowing them back in would just lower the price of oil.

It’s a balance of mutual terror. The oil producers need oil consumers, oil consumers want cheap product. If they are denied cheap oil, then alternatives will cut in and the oil market share will be capped and gradually it will erode. In time, the fat cats of the middle-east will be looking at how to raise tomatoes in the desert.

Russia really screwed up in its oil provision to Europe. When they used oil as a foreign policy hammer it cost them. No European nation can now afford to become dependent upon Russia for its oil. That spells big trouble ahead for Russia. They will likely have to privatize oil in order to get the markets back. This is a good object lesson to other nations in the mid-east that would use oil as a political hammer. Beware, lest the hammer bounce back and knock you out.