A thought about oil.

Source: The Economist

The economic growth of the BRICs and other developing countries has rapidly increased the demand for oil. The supply of oil is limited, in part by monopolistic policies and in part by the physical limits of the existing reserves. As a result, the price of oil has been going up rapidly, in the last decade, as is shown in the graph.

There are some expected responses:

• Changes in technology to increase conservation, such as the increases in auto efficiency that are being driven by governmental standards on gas mileage.
• Switches to alternative fuels such as natural gas, nuclear power, and renewable such as wind power, solar energy and biomass.
• New sources of oil will be developed as the price justifies higher costs of recovery.

Thus we see Uganda and South Sudan bringing oil fields into production. We also see U.S. oil production growing as fracking allows recovery from rock, and we see Canada exploiting its shale oil reserves. 

An interesting question is whether we will see economic down turns and reduction of monopoly power combine in some form to reduce oil prices. If that happens, what then will happen. I remember that we threw away the chance to make the structural transforms needed for improved energy efficiency between the oil shocks of the 70s and 80s and the one of the last decade.