Wednesday, January 12, 2011

Asking the Wrong Question About Rising Oil Prices

The Fiscal Times asks will rising oil prices scuttle the recovery. I guess that's an interesting question but it's the wrong one if you're looking for the big picture. A better question is how low does alternative transport gge (gallon of gasoline equivalent) have to get before you can have a vibrant economy at that transport price?

The first question's answer lets you know whether to invest for a recovery or a recession over the next year. The answer to the second lets you know when the age of oil will end. Supply may very well have actual oil prices well before the tradeoff point when it happens but behavior will still change because then the response to high oil prices will not be suffer a recession and thus reduce demand but rather will be a quick changeover of enough oil based transport to reduce demand by a like amount. The behavior, and the investment opportunities that derive from it are very different.