$100 Oil: What's Next?

It should come as little surprise that we are now approaching $100 oil. There is now a growing consensus that world oil production has peaked at approximately 86 million barrels a day, never to increase again except by more rapid production through the introduction of new technologies.

We can absorb Higher Oil Prices
If it is correct as many of the economists claim that oil use as a percentage of input into industrial production has declined since the 1970s, then world industrial economies should be able to absorb even higher energy prices before economies start to suffer recession from the increase in the prices of this vital input. Some experts, such as Matt Simmons, believe that oil at $300 a barrel is still cheap given the energy production and economic utility of one barrel of oil.

With the industrial economy's ability to absorb higher oil costs, I beleive that we may see $300 oil within the period of three years with little effect on industrial output and gross national products. As world economies begin to face the forces of economic contraction from oil prices beyond $300 a barrel, the possibility of recessions and "demand destruction" are a definite possibility which could have the effect of lowering oil prices temporarily. Lower oil prices would soon reignite suffering economies and thus send oil prices up again past $300 a barrel.

Geopolitical Competition
The stresses placed on individuals living in economies with the possibility of such variances in economic growth may create demands on states to ensure physical supplies of oil, the largest of which are in the middle east. This could result in intense geopolitical competition around the middle east.

Alternatives to hydrocarbons must be found as soon as possible in order to maintain global economic expansion. Almost everyone agrees that the world only has hydrocarbons enough to last the world for another 4o years at current levels of economic growth. There is wide skepticism that a replacement can be found in the short run owing to the high energy and economic costs of converting abundant geothermal and solar energy to individual and inustrial use.