Paging Adam Smith

PAGING ADAM SMITH….Jad Mouawad writes about oil production in the New York Times today:

As oil prices soared to record levels in recent years, basic economics suggested that consumption would fall and supply would rise as producers opened the taps to pump more.

But as prices flirt with $120 a barrel, many energy specialists are becoming worried that neither seems to be happening. Higher prices have done little to attract new production or to suppress global demand, and the resulting mismatch has sent oil prices spiraling upward.

….The outlook for oil supplies “signals a period of unprecedented scarcity,” an analyst at CIBC World Markets, Jeff Rubin, said last week. Oil prices might reach more than $200 by 2012, he said, a level that would probably mean $7-a-gallon gasoline in the United States.

I imagine that a global economic slowdown will flatten oil consumption a bit over the next year or two, and eventually higher prices will rein in demand more permanently. On the other hand, we’ve seen oil prices double three times in the past eight years without producing so much as a blip in rising demand. So if we’re in a genuine, long-term supply crunch — and all the evidence suggests we are — what price will it take to stabilize demand in its current neighborhood of around 85-90 billion barrels per year? Another doubling? Two doublings? Neither would surprise me. There are too many unknowns to pretend to have any kind of definitive guess, but still, if 2012 were an over/under bet for oil to hit $200, I’d take the under.

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