Oil is down to about $124/barrel. Apparently we're saved, as demand destruction is making gas cheap again. $124/barrel certainly wouldn't have felt like good news three months ago, but there you have it. Is this actually good news? Here are a few quick items to consider:
Head fakes are dangerous. Whether this price drop lasts a few weeks or a few years, it will have the tendency to lull the world economy into a dangerous sense of complacency. I guess we don't *really* need to address the energy problem, as oil is back down under $130/barrel (or under $100/barrel, or under $80/barrel). Then we continue to calcify our energy demand requirements as geological depletion marches ever onward. A price retracement increases the chance that we get caught unprepared facing the cliff on the far side of the undulating plateau of peak oil production.
Net exports continue to decline, down by another 90,000 barrels or so from May '08 to June '08.
Demand destruction keeps getting harder, while geological doesn't slow down. America still has lots of "low hanging fruit" to pick in the form of reduced consumption and energy efficiency, but each subsequent measure is more difficult, more inconvenient than the one before it (otherwise we would have chosen that one first).
Lower oil prices have the potential to boost a flagging consumer economy, and help America get through the "credit crunch." This might seem like a good thing at first--and in many ways it is. The credit crunch is a solvable problem--get rid of the irrational loans, stabilize the credit system, and there is no financial impediment to continued economic growth. BUT... continued economic growth means continued increase in ability to afford oil (even at current high prices), which will slow demand destruction and may ultimately exacerbate the problem. As counterintuitive as it seems, $200 oil by late this year probably makes $500 oil further away than $100 oil by late this year. I wrote about this in "Timing: The Credit Crunch & Peak Oil."
Finally, as I wrote last week, it really comes down to whether emerging markets can keep up their demand growth. If we accept a 5% rate of decline in production post-peak, the US can probably keep up that rate. It would be difficult for our economy and society to decline at a 5% rate year after year--the first few years would be easier, but it would get increasingly difficult--but it seems very possible by improving vehicle efficiency, increasing the use of electrified rail, etc. However, the US only uses 25% of the world's oil, so if we can match the 5% decline rate that doesn't get the world out of the woods. The rate of WORLD consumption must match the rate of world decline in production. As of now, there is no sign of demand destruction in India, China, Russia, or the third world in general--there are some signs of reduction in the rate of growth, but that is NOT the same thing. IF India, China, and others can hold non-US consumption flat (a big IF), then the US would have to decrease consumption at 20% per year to match a 5% global rate of production decline. That would be tremendously difficult--that equates to 4 million barrels per day less use the first year, 3.2 mbpd less the second, etc. until the US is only using 6.55 million barrels per day after 5 years--less than 1/3 our current use.
It will be interesting, to say the least, to see how things play out. I think that the best scenario is for a steady and slow increase in the price of oil. Unfortunately, what I think is more likely is a scenario where the only thing increasing more rapidly than the price of oil is price volatility. $200/barrel still won't surprise me this year, but neither will $75, or even one followed by the other in either order. Higher volatility makes it more difficult for consumers and voters to properly understand the nature of the problem that we face, and easier to blame some scapegoat. As I mentioned above, $3 gas by election day makes $10 gas likely to happen much sooner than if we have $5 gas by election day...