Where Should We Invade to Bring Down Oil Prices?

Where Should We Invade to Bring Down Oil Prices?
Money Morning ^ | 12/24/07 | By Martin Hutchinson

Posted on 12/24/2007 7:54:16 AM PST by DBCJR

According to Chavez, if the United States invades Iran we can expect crude oil to soar to $200 a barrel. ...

Chavez’s number appears to be plucked out of the air. If the United States attacked Iran, it would almost certainly result in an upward impact on crude prices. However being Shiite, Iran has no oil-producing allies - other than Venezuela.

The cost in lost production would be no more than 10% of gross world production. In the short term, the United States could use its Strategic Petroleum Reserve to plug the gap, but even if 10% of world production were lost for a considerable time, it would be most unlikely to send prices to $200.

As prices rose towards $200, the basic economic principle of supply and demand would cause oil consumption to decline in the face of rising crude prices. There is no evidence whatsoever that the marginal propensity to consume oil is as low as 0.1, which would be needed for a 10% reduction in output to produce a 100% increase in prices from already-elevated levels. Much more likely, a squeeze in output would spawn a price increase of no more than 20% - to a peak of $120 a barrel - with any higher prices being only a short-term blip due to speculative pressures... oil consumption would decline sufficiently as consumers and commercial interests alike adjusted to the much-higher costs of energy, transportation and raw-materials costs. The U.S. and global economies would undoubtedly slow markedly - and would most probably even drop into a recession. But that recession, in itself, would reduce oil consumption and would therefore arrest any additional upward movement in oil prices.

...

(Excerpt) Read more at moneymorning.com ...

TOPICS: Business/Economy; Foreign Affairs; War on Terror
KEYWORDS: chavez; energy; iran; oil; venezuela

Navigation: use the links below to view more comments.
first 1-20, 21-40, 41-60, 61-80 ... 121-127 next last

That being said, I still believe the USA needs to become self-sufficient: 1) open up exploration, 2) develop more energy efficient vehicles and appliances, and 3) develop more economically viable energy alternatives. Not only does dependence on foreign oil hold us hostage (perhaps to a lesser degree that Hugo thinks)but it contributes to a balance of trade deficit. Herein is our main economic woe. The lack of USA self-sufficiency and our over-consumption has led to extreme deficits associated with huge amounts of consumer debt. Much of our consumer goods are coming from China who also holds enormous holdings of our debt securities, as do many oil producing countries. Our dollar is dropping like a rock in value. There are other measures of inflation than price. We need to be looking at those. Our economy is headed in the wrong direction.

Hutchinson goes onto say:

"Analyzing Chavez’s threat demonstrates an important fact, however: At $90 per barrel, crude oil is already up more than 50% so far this year. While the current price may be below the inflation-adjusted equivalent of the $40 "peak" reached in 1980, it’s important to note that oil prices remained at that pinnacle for a very short time, retreating to the $28 to $32 range where prices stayed until further supplies came on stream in late 1985. Prices then collapsed to $10 a barrel.

Thus, the current $90 plus oil price is likely to be fairly short-lived, even if the frenzied mania of speculation pushes the price up and over the $100 level before the market turns. The global economy is already starting to slow and new International Monetary Fund (IMF) data demonstrates that world growth in the last few years has not been over 5% - which would have been a record - but has actually only been running at around 3.8% — somewhat less than the boom times of the middle 1980s."

The cure for high oil prices is world-wide recession. I think the three step plan I suggested is a better alternative. To accomplish that requires some economic engineering supplementary to strict lasier faire market economics. Government tax incentives, even regulation (i.e., automobile fuel efficiency standards) might be necessary.