Why oil prices will keep rising...

The chart shows the prices per barrel over the last year.

This New York Times article explores the reasons why oil prices keep rising. Fortunately, they have not mentioned the myth that somehow the Iraq war was responsible for the increase. A couple of dollars increase might be attributed to the Iraq war, but not the 40+ dollars that it has increased in recent months.

In one of my classes this semester, Mr. Jack Guynn, the President of the Federal Reserve Bank of Atlanta from 1996 to 2006 told us that there was a widespread belief amongst the previous federal reserve bank (the one headed by Greenspan) that oil would never rise over 60-70 dollars a barrel for a sustained period of time. 100 bucks was unimaginable. Talk about being wrong!

Over and above that, like I said, I think oil is currently underpriced. The futures are being overtly optimistic because they ignore China and India's voracious appetites, and the way their growth is going to drastically affect oil. Also, as the NY Times article explores, producing oil is getting more and more expensive. What a lot of people are missing is that all the easy places to get oil from have already been tapped. When oil production facilities were planned, the first places tapped were those which had the highest probability to contain oil. Now all you are left are the places which had low probabilities of having oil.

The extra cost due to this is partially offset by the fact that new technology makes prediction better, but the fact that most of the politically stable places have already been tapped is still absolutely true. Now you have to bargain with dictators and unstable governments to get more oil which leads to costs besides just money. As I explain in this blog post, this is one of the reasons why China has prevented any real action being taken to prevent the Darfur crisis. The costs in human life is something that will never be reflected in the dollar price of oil.

So really, for a myriad of reasons, it really is about time we start moving away from oil as fast as possible.