Two Cheers for Expensive Oil

THE MARKET AT WORK

Widespread fears of waning oil reserves are obscuring the real reasons for the cost of crude oil today. The truth behind high prices is mundane: they are the result of extreme economic processes, not geological limitations. The current "crisis" is being driven by the reduced availability of crude on the world market and the inadequacy of the oil industry's refining capacity. Both conditions were brought on by years of low oil prices, inadequate investment in infrastructure, and producers' fears of surpluses. Since 2003, the situation has been exacerbated by an unexpected increase in the global consumption of crude.

As market forces have kicked in, high prices have already started to generate more investment, which will boost both production and refining capacity in the future. In other words, high oil prices are a painful but necessary cure for the disease that has affected the oil market for about 20 years.

Still, the danger remains that prices could stay too high for too long, provoking a drop in demand just when new production and refining capacity start to come on-stream. This, in turn, could send prices spiraling downward and put an end to the current move toward greater investment, leaving the fundamental problems of the oil market unsolved. Such a development would delay needed changes in the consumption habits of industrialized societies and set them up for another crisis in the future.

NOT SO DRY