The Peak Oil Crisis: Assesing $200 Oil

Three months ago anyone talking about $200 oil was considered a fear monger, or worse, but things happen fast these days. In the intervening period, oil prices have risen by nearly $40 a barrel and show no signs of stopping. All of a sudden it has become fashionable to start talking about much higher prices and to start thinking about the implications of multi-hundred dollar oil.

Among the many debates going on over oil is one holding that crude will never get much beyond $200 a barrel because at such an extreme price, demand for oil products will drop so much that prices will fall back to more affordable levels. Countering this argument are those who point out that nearly half the world’s population can buy oil products subsidized by their governments or national oil companies, will never be subjected to the high world prices and will go merrily along increasing their consumption for a while longer. While demand for oil products in the U.S., Europe and other OECD countries is starting to slip, this drop in consumption is more than being made up in the subsidized societies of Russia, the Middle East, India and China.


If oil prices move from $140 to $200 the impact is going to be felt more harshly than during the climb from $20 to $140 that has taken place in the last few years. To the surprise of many, oil consumption in the U.S. did not begin to drop noticeably until the price moved beyond $100 a barrel and even then it is only in the last few months as gasoline approached $4 a gallon that a significant drop in consumption was noted.

As oil approaches $200 a barrel, the impact will be distributed unevenly, depending on one’s circumstances, job, lifestyle, geographical location and a host of other factors. It may be easy to say that consumers will simply cut back on discretionary spending, but in the U.S.’s “service economy,” a large share of the jobs currently depend on discretionary spending. As a larger share of disposable income goes for the essentials of life – food, shelter, clothing, medical services and of course transportation to places of employment – discretionary spending on vacations, recreation, entertainment, eating out and “stuff” is bound to fall sharply.

Falls Church News-Press