Housing starts are still dropping, the credit markets are still trying to find the floor on their losses, and both economists and ordinary folks are seeming to expect a recession in the near future.
 
One of the reasons is the cost of gasoline and other petrochemical energy, along with the efforts of Congress to turn corn farmers into the next Bill Gates’s – at least at the bank. Everybody assumes that gas prices will keep going up. Congress assumed it when it raised mileage standards and the car companies made that same assumption. Everybody, it seems, think the Prius is the future.
 
So, maybe now would be a good time to buy a truck or truck-based SUV – maybe, especially, a late-model used one just of a short-term lease. Something that meets every sense of the term “gas guzzler.”
 
Crazy?
 
Not if you follow the reasoning of an expert whose thoughts were recently reported in the Wall Street Journal’s print edition.
 
Economist John Cassidy is predicting that oil prices will drop.
 
Yes. Drop.
 
A lot.
 
Potentially as low as $30 per barrel.
 
Though what he says isn’t conventional wisdom, that doesn’t mean he’s right. The herd mentality often allows insight to be ignored in favor of the ostensibly obvious. And, he’s supported by many other economists, differing from them only in the degree of the predicted price drop.
 
Cassidy has credentials. For the popular reader, he’s a regular contributor to the New Yorker and to Portfolio. He’s also the author of acclaimed books, including “Death of the Middle Class.” His views are often contrarian, but never dull, and always factually grounded in a realistic analysis of events from an economic perspective.
 
Many economists see oil prices declining, as a result of increased production begun in an effort to meet increased demand meeting an economic downturn in the American economy decreasing demand just as that supply increase hits full force.
 
But Mr. Cassidy adds another element. He sees a permanent increase in the supply of oil due to the long-term effects of higher oil prices. He’s referring to the level of oil prices today versus those of several years ago. By historic standards, oil prices today are extremely high, much above levels to which the industry had been accustomed for over a decade. As a consequence, says Cassidy, it is now economically feasible to recover oil from reserves that were not, when prices were lower, able to be exploited at a profit.
 
In short, Cassidy thinks that the supply of oil is likely to dramatically expand in the future, just as the demand for it also expands due to development in places like China. Oil companies cannot turn on a dime and exploiting reserves is very expensive, but when convinced that long-term demand will make recovering the oil profitable, companies will invest the funds necessary to drill for it. 
 
Cassidy makes his point bluntly: “When experts claim that oil is running out, what they really mean is that cheap oil is running out.” In point of fact, however, what we’ve got now isn’t cheap oil, so it is now possible to exploit oil reserves that are economically viable only when oil is not cheap. And there are a lot of those reserves.
 
Of course, the concept of supply and demand setting a market price is treasured only by economists, and no group despises that concept more than politicians. Politicians would always rather set the price themselves, especially when that means telling people how to live.
 
But wouldn’t it be a treat if Cassidy is right?
 
And, once again, Congress is wrong.
 
If you want to explore his thoughts further, Cassidy has a thought-provoking article on the topic in the January 2008 Portfolio: http://www.portfolio.com.

What do you think?
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