Oil Crunch Ahead?

IEA sees oil supply crunch after 2010

Crude-oil supplies will be tighter in coming years, with a "supply crunch" after 2010 as OPEC's spare production capacity evaporates, the International Energy Agency predicted Monday.

Supplies will tighten because economic growth will drive up demand and offset significant increases in oil-refining capacity, the IEA said, according to media reports citing the agency's annual medium-term forecast.

The IEA, which monitors energy markets for the world's 26 most-advanced economies, doesn't forecast oil prices, but its conclusions imply consumers should expect continued upward pressure on energy costs, The Wall Street Journal reported in its online edition.

"Oil and gas price pressures look set to remain in the coming years," the IEA reported, according to the Journal. "Slower-than-expected (gross-domestic-product) growth may provide a breathing space, but it is abundantly clear that if the path of demand doesn't change on its own, it may well be driven to change by higher prices."

Don't go out on the window ledge just yet. Will oil get more expensive? Sure. Will demand for energy grow? You bet. But not to worry, economics will keep things in equilibrium over time.

Here's why.

As prices of a given commodity increases relative to income, the consumer begins reassessing the value of that product to their everyday life. We make our purchasing decisions at the margin, i.e, what is the next unit worth to me, and at some point it is just not worth the price anymore.

So, as oil prices rise, we re-evaluate our consumption patterns, shift consumption patterns and so, over time, alter our demand for various products to stay in equilibrium. All that means is some consumers will be priced out and lower their consumption patterns, plus other energy sources and means of transportation now become more viable and affordable.

I know of several people who are bicyling to work in good weather now, as I have now for years, because of the recent price rise. For the past few years I have made a summer golfing trip to Alabama. This year I am skipping that trip and golfing locally cause it is just not worth spending a couple hundered dollars in gas to me to go.

While those are minor anecdotal examples to be sure, the cummulative effect of millions of similar decisons by other consumers across the land will keep things in equilibrium.

Sooner or later, almost everything boils down to economics.