Tuesday, June 28, 2011

More Reasons Why Oil Prices are Going Up

For all of you “oil price equals inflation” enthusiasts, watch what happens with Japan’s nuclear power industry. Reports are that after April of 2012 Japan will have no working reactors. They will have all shut down permanently for various, mostly irrational, reasons. To still provide power, Japan will have to import fossil fuel, oil, to the tune of about $30 B a year. Think that won’t have some impact on international oil prices?

Coal fired power plants in the U.S. are expected to be shut down over the next few years because of environmental regulations. Where that power will come from is not clear as far as I can see, at least publicly, but oil may play some role (I would like to hear form someone with accurate information).

Those people in the U.S. who are losing their coal-fired power plants will see a double attack on their standard of living. Not only will their electric bills go up by an estimated 40% to 60%, but their bill for fuel for their car will stay high or also go higher. Who will they blame?

In other words, for various reasons, mostly having to do with government regulations, we are going to see a necessarily higher demand for oil over the next few years. If the large developing nations, especially China (I have written about China’s potential difficulties, so its oil demand is not a sure thing.), continue to demand more oil, and the nations of the world continue to restrict the oil industry’s attempts to find, develop, and produce from oil exploration (government owned “oil companies” are not competent to fill this need), we will see oil prices stay high, very high. As of this writing, oil prices are about $90 a barrel for light crude. (The price is lower than it was because a few countries, including the US, released oil from reserves. This is a short-term bandaide and will only mask the problem until they stop releasing oil or can’t release any more. No one is moving to free the oil companies.) If China continues its present demand level, we can expect to see oil prices rise. If China has economic problems (as I think it will) then oil prices will merely stay near their present levels as all of these regulations and irrationalities play out.

1 comment:

  1. I think mislabeling rising prices as "inflation" (and thus diverting attention from the expansion of counterfeit credit) is one of the big smoke screens of Keynes/Friedman.