Stopping Oil's Assault
Ever-rising fuel prices are a monstrous supply-demand problem. Here are five possible solutions.
What would it take to stop the madness of rising oil prices?
Shocking increases in crude-oil costs - which spiked above $135 a barrel at one point last week - are now pushing airlines and truckers to the brink, forcing many consumers to say they are staying home this holiday weekend, and recharging fears of recession in the face of $4-a-gallon gasoline.
It's a supply-demand problem on steroids. Here are five possible solutions, along with the outlook for each.
Solution No. 1:
Reduce world demand for oil.
Outlook: Very unlikely. But oil supplies haven't changed much over the last five years, so why not simply throttle back demand? Well, who isn't trying? Hybrid cars and fluorescent bulbs help. But as the saying goes, the genie is out of the bottle. Oil demand, particularly from China, continues to skyrocket.
At the same time, efforts to switch to alternative fuels continue to stumble - and are short-term losers. Converting corn to ethanol is making food more expensive, and scarce, some experts say. Building more nuclear power stations would take years. Solar and wind power? Planners are just waking up to the huge amounts of real estate the current technologies would consume to reach meaningful outputs.
Solution No. 2: Pump more
oil out of the ground.
Outlook: Not likely for decades. The International Energy Agency, which is based in Paris, said last week that oil companies might be incapable of keeping up with demand for the next 20 years. The OPEC oil cartel is disinclined to try harder, and some of its officials even question whether there is a supply shortage. On Thursday, OPEC Secretary-General Abdullah al-Badri pointed a finger at market speculation and the weak dollar to explain high crude prices. "Even if we increase output tomorrow, the prices will not come down, because of speculation and because of a weak dollar," he said. "When we see there is a shortage of supply, we will act."
Solution No. 3: Pop the speculation bubble.
Outlook: Try changing human nature. If wild speculation is the problem, let's round up those naughty traders and bus them to Chester and Bensalem to bet the slots and ponies instead of the price of a barrel of crude.
But then what? Speculators, who never intend to take possession of a barrel of oil, are simply paying what they think that barrel will be worth at some future date. They're taking into account all the same fundamental factors that have propelled the price of oil up for the last six years.
Solution No. 4: Strengthen the weak dollar.
Outlook: This could happen in coming months. The Federal Reserve has signaled that it doesn't see further interest-rate cuts for now, and OPEC President Chakib Khelil told Reuters last week that a 10 percent gain in the dollar probably would result in a 40 percent drop in oil prices. This is largely because oil futures are traded in dollars, and a weak dollar makes oil less expensive to buyers dealing in other currencies.
Meanwhile, the price of oil has tended to slip on any day that the dollar strengthens against the euro. Economists still disagree, though, on how best to shore up the dollar and about what effect that would have on the overall economy. Instead, the Fed has been trying to stave off recession and solve a credit crisis by lowering key interest rates.
Solution No. 5:
A big, bad recession.
Outlook: Sadly, this could happen, regardless of the efforts of the Fed, stimulus checks and anything else.
And it is oil that could finally tip the economy into recession.
Experts say gasoline prices have yet to catch up with the spike in crude, and $200-a-barrel oil, which some officials say is possible in the next two years, could cost $6 per gallon at the gas pump.
Chances are, that'll do the trick.