For Oil, Politics Trumps Economics

The oil story du jour comes from the New York Times, which paints an unsurprisingly bleak picture of a future global supply crunch that will make today's problems look benign.

The Times notes that geopolitics is driving oil prices higher at a time when basic economics should be driving them lower. Higher prices should result in curtailed demand and, while that trend is evident here in the U.S. as consumers are driving less, just the opposite is happening in devloping countries around the world:

"In the United States and through much of the developed world, the higher fuel prices have led drivers to reduce their consumption, and gasoline demand is expected to drop this year. But that drop will be more than offset by the rise in energy demand from developing countries. In the next two decades, demand is projected to jump by 35 percent, and developing countries will consume more oil than industrialized countries."

A logical response to this pattern would be to ramp up production, but OPEC is-- unapologetically--- a cartel that exists to manipulate supply and prices, and non-OPEC countries have not stepped up to the plate.

According to the Times:

"Some regions are simply running out of reserves. Norway’s production has slumped by 25 percent since its peak in 2001, and in Britain, output has dropped 43 percent in eight years. Production from the giant Prudhoe Bay field in Alaska has dropped by 65 percent from its peak two decades ago.

In many other places, the problems are not below ground, as energy executives like to put it, but above ground. Higher petroleum taxes and more costly licensing agreements, a scarcity of workers and swelling costs, as well as political wrangling and violence, are making it harder to raise production."

All of this leads experts to the inescapable conclusion that things are not getting better any time soon.

Oil Price Rise Fails to Open Tap [New York Times]