The Oil Conundrum

The lynchpin of the global economy, oil, has a tankful of contradictions.

Conundrum #1: A Free, unrestricted market is the presumed premise upon which globalization proceeds. Yet the largest cartel on the planet controls the pricing and production of oil, the most essential commodity for continued growth. Everything, from cars to cabbages, depends upon its adequate supply. If the free, market of globalization is to proceed as planned, how can it succeed if a cartel controls the single most important commodity for its continued success?

Additionally, no one seems to be clear as to why the price of oil continues its upward climb. If a cartel, through production quotas, cannot control the price, who or what does?

In the past, the OPEC cartel seemed firmly in control of the price of oil. Proceeding on the assumption that this fact is still true, President Bush asked his friends at OPEC to raise production.

OPEC refused, admitting, for the first time, that it no longer controlled the price. Asserting there were no shortages, OPEC blamed both the falling dollar and speculators.

Conundrum # 2: If market speculators are driving the price, how are they doing it if there are no shortages as OPEC claims. Are we ready to toss in the economic towel and claim supply and demand are no longer operative?

Conundrum #3: If the falling dollar is driving the price, how can the price continue to reach all-time highs even after the price is adjusted for inflation?

Conundrum #4: If there are indeed shortages, where are they? Who is experiencing them? Aside from Nigeria, which has its own problems with local supplies, are there shortages anywhere? During the Iran hostage crises, gas stations were open sporadically. Sometimes they had gas; sometimes they did not. That is a shortage. While peak oilers can claim that for the last few years production has been flat, can they explain the rise in price as a function of supply and demand?

Is the price rising on the expectation that we are indeed approaching peak oil?

Unfortunately, even though many fields are in decline and even though discoveries are not coming on board as quickly as they once did and even though the world’s appetite for energy is increasing, we will never know when peak oil has arrived until after the fact.

It seems to me something has to give here.

Do we toss out the principle of supply and demand?

Do we toss out a well-functioning market place?

Are we approaching peak oil? Who knows it and how do they know it? Can these knowledgeable folk explain it in terms of supply and demand?