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June 16, 2009

Deja-Vu. Oil Prices Rising (again)

It's time to party like its 2008 - because, the way gas prices are rising right now (prices are double what they were just a few months ago in February) it looks like we might be in for a redux of last summer. Can anyone think of a catchy sequel for "Drill, Baby, Dill"?

Why are gas prices rising? I'm no economics expert, but this article from Fortune gives a great overview for us dummies.

Deutsche Bank's Sieminski agrees that prices are going higher over time. "Our forecast has been that oil will be at $100 in 2015 and it could happen faster if the economy recovers," he says. Because oil is generally considered an "inelastic" commodity -- meaning it takes a big increase in price to produce a small change in demand -- the chances of a spike increase once supplies get tight.

"If you get close to the balance, prices can go haywire very quickly and there's very little that can be done about it," says Sieminski. "Something happens on the margin to put pressure on the market and instead of the price adjustment being gradual it's a step change. Last time gasoline had to go to $4 a gallon and crude had to go to $150 a barrel to rebalance things. And that's how we could get there again."

Diversifying our energy sources - instead of overelying on fossil fuels - would be a great solution to protect our economy from the whims of the oil market - and would help reduce the inelasticity of oil due the abundance of alternate energy sources (called "substitutes"). How many substitutes are there right now for the gas your pump into your car?

One thing not being mentioned? The strange preposity of higher gas prices resulting in higher profits for big oil. Hmmm..


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