REDUCING OIL CONSUMPTION CAN'T BE LEFT TO THE MARKET:

Calling an end to oil alarmism (Philip E. Auerswald, January 23, 2007, Boston Globe)

Consider the following facts:

Oil producers don't like oil prices that are "too high." Adel al-Jubeir, foreign policy adviser to Saudi Crown Prince Abdullah, offered this frank assessment to The Wall Street Journal in 2004, just as oil prices began to increase sharply: "We've got almost 30 percent of the world's oil. For us, the objective is to assure that oil remains an economically competitive source of energy. Oil prices that are too high reduce demand growth for oil and encourage the development of alternative energy sources."

In response, Saudi Arabia ramped up oil production, from 8.5 million barrels per day in 2002 to 11.1 million in 2005. Far more dependent on oil revenue than we are on oil, the Saudis lose if a high price today prompts their customers -- us -- to develop substitutes for use tomorrow.

The upswing in the price of many commodities, including oil, over the past five years reflects positive economic developments. In the next two decades or so, most of the world's population -- including a couple of billion in China and India -- will finally become full partners in the world economy.

This is good news. For the foreseeable future potential supply problems -- whether caused by terrorism, political disputes, or other issues in the Middle East or elsewhere -- will have far less of an impact on prices than these changes on the demand side.

Oil can't easily be used as a strategic instrument of aggression against the United States. Petro-alarmism focused on the Middle East often emphasizes the concentration of oil reserves and spare production capacity in a few oil-producing nations, particularly Saudi Arabia. But reserves are only useful as a strategic weapon in pushing prices down. Only by withholding output -- and threatening their own livelihood -- can producers push prices higher.

The impact of higher fuel prices on most US consumers is minimal. From 1980 to 2005, the share of consumer spending on energy actually dropped from 8 percent to 6 percent...

To have any real impact on consumer behavior you're going to have to impose artificial price hikes via taxes.

Posted by Orrin Judd at January 23, 2007 7:45 AM