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Oil Prices: Cause And Effect

An important point from Alan Reynolds [1]:

"The price of crude didn't rise from $12 in early 1999 to nearly $60 because the world suddenly ran out of oil. On the contrary, the world supply of petroleum has risen 10 percent since then, according to the International Energy Agency (IEA), from 65.8 million barrels a day in 1999 to 72.5 million in 2004. Cambridge Energy Research Associates estimates global oil production capacity will increase at least twice that rapidly over the next five years -- by as much as 16 million barrels a day by 2010.

Oil prices did not quintuple after 1999 because Americans suddenly switched from mini-cars to SUVs. On the contrary, if all passenger cars, pickups and SUVs were replaced with bicycles, the United States would still import a lot of oil.
We import nearly 58 percent of all petroleum, yet only 45 percent of each barrel is used to produce gasoline, and a significant portion of that gasoline is used in delivery vans and taxis. Commuter and leisure driving accounts for little more than 40 percent of the oil we consume -- far less than the amount we import"

Did you note that? Go back and read it again;
Getting rid of the SUV won’t solve a thing. What’s in America’s driveway, is not the problem.

He goes on to point out that the real key, here, is the amount of industrial activity.. and not just in the US and China, but elsewhere. When industrial production of all goods, (Consumer and otherwise) falls so too does the price of oil.

Want the bad news first? High oil prices have already slowed industrial production in many countries, even China and the United States to a lesser extent. Leading indicators point to wider and deeper trouble ahead.

The good news is that oil prices have proven very sensitive to industrial production, so this problem is self-limiting. Cost-squeezed industrial firms -- not necessarily in the United States -- will be reducing production and thereby reducing world oil demand and prices.

RTWT.