The End of High Oil Prices: Don't Count On It

In 2008 oil prices reached new levels never seen before. Just a few years earlier, $50.00/barrel seemed like it was high, but things changed. Global supply became tightly linked to an increasing demand causing a steep rise in prices, decreases in consumer confidence, cost pressure on the U.S. economy and inflationary rises on the cost of living all contributed to concern over the cost of oil and related products.

The question and problem of high oil prices led to significant inquiry into the possibility of alternative fuels and the future prices of oil and its economic effects. Advocates for biofuels claimed the alternative fuel industry was growing and could be a vibrant economic stimulus to an economy while oil commodity speculators continued to drive the price of oil higher based on concerns regarding low supply numbers and fears of political instability in high production oil states.

To illustrate the advancement of alternative fuels, Steve Magami, Chairman of Stratos renewables, a Peruvian sugarcane ethanol plantation and milling company, stated, "High oil prices are affecting everyone, and expediting the search for replacements to oil will ultimately invigorate many economies. As an example, when the country of Brazil mandated the switch to ethanol, in three years their new flex fuel car fleets rose from 4% per year to more than 85%. They've replaced the use of over 40% of the gasoline they used with ethanol primarily from sugarcane and in doing so they've created more than 1 million jobs. Since 1975, by refocusing their energy dependency toward ethanol and away from petroleum-based fuels, they've stopped the shipment of $59 billion dollars to the Middle East. That money has stayed in their own country. Think of what that's done for their economy."

Some industry analysts also supported the view alternative fuel was a factor in the fuel equation, but also claim this is not the only factor in the price of fuel. In an article written by Heny Stimpson of Stimpson communications entitled 'Unloved securities offer opportunities in hazardous '08', he quotes Jerry Miccolis a CFA and senior financial advisor as stating "We could see prices anywhere from $75 a barrel to $200 in the short term. Too many things are unpredictable: strife in Middle East, OPEC's whims, alternative energy sources coming online, and greater volatility because more investors are speculating in commodity futures." The point being, the price of fossil fuel such as oil was a speculative question, and that significant change in any one factor could lower the price of fuel enough to also lower incentive for alternative fuel start ups.

Additionally, industry watchers even claimed the high price of oil had everything to do with taxes and less to do with supply and demand. Ralph Lawrence, a long term brokerage service provider, claimed in a Helium, Inc. article, entitled 'Will rising gas prices in America cause an Economic depression" "high oil prices are a "fashionable farce" caused by taxation of oil. "The Exxon Corporation's $40 billion profit for 2007 was the largest in corporate history. Yet they paid $100 billion in taxes and royalties. Exxon's profit margins are slightly under 11%." In such case, the high price of oil is catapulted not solely by importation costs, but by added taxes, making the problem partially a matter of operating costs rather than cost of fuel, not to mention the supply chain costs incurred from the relocation of oil and refined product from location to location.

So would the price of oil continue to rise and would an alternative fuel industry emerge in full force? The answer to that question was evidently multi-tiered having to do with a number of factors including supply, demand, legislation, alternative fuels, operating costs and speculation. Would the Chinese Government's lowering of oil subsidization lower demand? Would Iraqi oil drilling contracts increase supply? Would the U.S. Government lower taxes on oil companies and would the alternative fuel industry lower cost pressure? These were factors that would play out in 2008 and that would lead to a later outcome and evolution of events that would reflect the global will to continue economic development and energy supply.