I imagine that President Bush hopes to get the Saudis to produce more oil, which he believes would reduce oil prices. However, I read that Saudi Oil Minister Ali Naimi said that the Saudis could increase production capacity to 12.5 million barrels per day by 2009, up from the 9.5 million barrels produced today. These increases will have virtually no effect on the increasing demand for oil coming from countries such as China and India. As more and more economies emerge from third world status into the global economy their increased demand for oil will drive prices ever higher. Unlike the oil price rises of the late 1970s, which were an artificial creation of an OPEC embargo, this price rise is due to significant increases in real demand.
Demand of this sort can only be solved in three ways,
either a tremendous increase in output of oil by producer nations creates a surplus of oil, or consumer nations reduce their consumption thereby creating an over supply of oil, or that the United States look at possible substitutes or alternatives for oil to moderate demand by providing consumers choices or substitutes. The first approach is necessary; however, as we have heard from the Saudi Oil Minister, increases in production won’t be coming any time soon. There is also a good chance that by the time the extra oil capacity comes online the emerging economies will grow to soak up all of that capacity. The other option, to find substitutes, is also a long term solution; however, unlike finding more oil, substitutes will have a strong moderating effect on future oil prices because consumers can switch to a substitute if oil prices get too high.
The two oil substitutes that need the fewest infrastructure changes for distribution are natural gas and electricity. Unfortunately natural gas prices have recently risen dramatically in resent weeks and the added demand created by shifting America’s motive power to natural gas will probably push prices up much higher. Electricity, on the other hand, has the added advantage of being produced from a variety of fuel sources such as natural gas, coal, nuclear, as well as renewable sources such as wind, solar and hydroelectric power. This variety keeps prices for fuels under control by distributing demand among a wider variety of fuel suppliers. Both electricity and natural gas can be used to provide choices to consumers and provide a moderating force on run-away oil prices. Some other reasons for using alternatives to oil are a lower impact on the environment and lowering our dependence on foreign sources of energy. Still, for strictly economic reasons, alternatives are now a necessary strategic response to preventing future economic hardships caused by oil price increases.
