Why $120 oil is good

Speculators are often blamed for artificially inflating crude prices, but some experts say high prices are needed to cut demand and develop new resources.

NEW YORK (CNNMoney.com) — With $120 oil not seeming to follow the fundamental law of supply and demand many are wondering if the market is broken.

The Federal Reserve has been cutting interest rates, saving Wall Street but sinking the dollar and driving up food and fuel prices. Investors, also called “speculators” by some, have been pouring money into commodities of all sorts, artificially driving prices higher in an attempt to squeak out healthy profits in the face of falling stock values.


But to many, all the financial voodoo is merely a distraction. The fundamental reality of oil – and the thing that makes it so attractive to investors in the first place – is that we are using ever more and finding ever less. High prices are necessary if we are to reduce demand, find new oil, and develop alternative technologies.

“The market is starting to send a signal: You got to get your alternative in line,” said Robert Kaufmann, director of Boston University’s Center for Energy and Environmental Studies. “Societies that ignore this kind of signal do so at their own peril.”

Kaufmann isn’t promoting the so-called “peak oil” theory – he doesn’t think the world is quickly running out of oil.

The problem, he says, is new discoveries of crude in non-OPEC areas like the U.S., the North Sea, and Russia have not kept pace with the oil being removed from those places. OPEC, which holds two thirds of the world’s crude oil reserves, has seen no drop in global demand despite $120 oil and has little incentive to increase output.

CNN