Can Gas Prices Stay High Forever?

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We are now well above the tipping point at which we have been told all sorts of technologies become cost effective that can compete with traditional petroleum sources. There is coal gasification (we have coal out the wazoo), tar sand distillation, oil shale distillation, or bio-fuel production to name a few. There is a notion that gas prices cannot stay above this tipping point forever because, eventually, the plant capacity for these other sources of petrol will be built up, and, once they are, supply can be increased relative to the level of demand with the effect of lowering the market price.

One problem is that investing in these plants is seen as a risky endeavor. There are huge up-front capital costs that may be impossible to pay back if the Organization of the Petroleum Exporting Countries (OPEC) decides to flood the market. In other words, I build a tar sand distillation plant from which I can sell my product profitably at $3.00/gallon and then OPEC has a meeting and decides to target $2.50/gallon, I will be bankrupt. It may be getting harder and harder for OPEC to dump oil on the market in order to radically drop prices because many member countries claim that they don’t have much excess capacity. In other words, they can’t increase output by much, and price inelasticity of demand for fuel means that the little extra does not have a major impact on prices. However, it may be hard for investors to develop confidence that the OPEC is out of excess capacity, given its historic ability to produce enough to effect prices.  

I’m interested in what market-based solutions exist to facilitate stable conditions for alternative fuel suppliers that are minimally distorting. Of course, from an environmental point of view, targeting demand reduction is far preferable to increasing supply capacity. Perhaps, demand reduction is the way to go entirely. In some sense, the high prices themselves are a good means to decrease demand.

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Filed under Carter Doctrine, Economics, Energy, Foreign Policy, National Security, energy security, politics, public policy, technology

Tags: Energy, alternative fuels, economy, Foreign Policy, tar sand, oil shale, coal gasification, energy security, OPEC, Organization of the Petroleum Exporting Countries