Editorial: John McElroy on the burst of the oil bubble

Over on Autoblog, veteran auto writer and new contributor John McElroy provides an interesting take on gasoline prices and the potential for the bubble to burst. Looking at gasoline pump prices in real terms (factoring in inflation) as recently as the beginning of the current decade, they were at an all-time low. Even now, with oil hovering near $100 per barrel, the price is still barely up to the peaks of 1979-80 and during World War 1. McElroy's assessment is that the current spike, like the previous events over the past century, had more to do with political unrest and uncertainty than any actual technical supply/demand reasons. As a result, if the current period of uncertainty ends, the price could well drop back down again. Keep reading my assessment after the jump.

[Source: Autoblog]

There is certainly a possibility of oil prices plummeting again. It's a concern that's been raised by many analysts and executives both inside and outside the auto industry. Because of the long lead times and huge capital investment required to mass produce any new automotive technology, any uncertainty is dreaded. If you spend a few billion dollars developing batteries or fuel cells or anything else and gas prices go back to $1.50 (in real terms) all of that could be lost as the market shifts back to less efficient vehicles.

Even disregarding the perspective of the manufacturers, there are two other problems with the potential for oil prices to drop again. First is the environmental concern. Every major carmaker has now publicly acknowledged that climate change is happening and that their products are part of the problem and part of the solution. They are working feverishly to develop technology that will help reduce fuel consumption and emissions. They realize that if fuel prices rise, it's in their interest to build vehicles to address that problem. If their products can help reduce operating costs for their customers, that leaves more money in the customers pockets. That's money that can be spent on buying those new cars.

Finally, even if you buy into McElroy's premise or the environmental issue, there is the national security issue. It's simply foolish for such a large proportion of our economy to be so dependent on a resource that often comes from countries that are not so friendly or are simply unstable. Yes, Canada and Mexico are the biggest suppliers of oil to the U.S., but after that it doesn't look so good. Reducing petroleum consumption is just a wise thing to do in geopolitical terms.

So what does all of this mean? Maintaining high oil prices is actually probably in the United States' best interest. The U.S. Congress had an important opportunity to take part in this during the past week. The President and most of the Republicans in the Senate along with Democrat Mary Landrieu forced the removal of a tax provision in the energy bill. A big part of that was the repeal of $13 billion in tax credits to oil companies. If this had gone through, the increases would almost certainly have been passed along to consumers. But that probably isn't such a bad thing right now. What should probably happen is a tax on fossil fuels that would maintain at least a minimum price for gasoline in real terms.

As long as politicians remain in power who continue to support an endless war on an idea or tactic, the price of oil is likely to remain high. However, in this scenario the main financial benefit goes to oil producing countries and companies. If however, policy changes cause oil prices to drop and taxes keep the retail price up, the tax revenue could be used to help fund research into new technology. Alas, heading into a presidential election year, it's unlikely that anyone is will show the backbone to suggest anything approaching this sort of plan.

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